Pop a small cap fund in your Isa

Steve Gibson, portfolio manager of the Fidelity MultiManager Balanced Fund tells us what he'd put in his Isa now.

With so many funds to choose from, ensuring the correct investments are included in your ISA can make even the most seasoned investors dizzy. When selecting a fund small cap specialists are often overlooked, but when it comes to stock picking in a rising market this area of the market may hold the most opportunities.

Most UK large cap funds are selecting from a universe consisting primarily of companies in the FTSE 350. Excluding investment trusts, that's a choice of around 300 companies. Most of these are heavily covered by sell- and buy-side analysts, so gaining an analytical edge is difficult. Compare that to the 1,000 or more names on offer in the small-cap space across the FTSE Smallcap, Fledgling and Aim indices. These companies can offer exposure across all market sectors and the globe, and many have minimal, if any, coverage, vastly increasing the opportunity for a skilled fund manager to uncover real 'hidden gems'.

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Then there's the small cap premium. Smaller companies, in aggregate, should offer higher returns than larger companies over the long run, albeit with higher volatility. Research from Dimson and Marsh of the London Business School shows that the bottom 10% of the UK market by value, has beaten the wider market by around 3% a year, back to 1955.

The Fidelity Select List recommendsfour UK smaller company funds. All have highly experienced teams dedicated to small cap investing, each with a well defined process and an outstanding track record.

1. Marlborough Special Situations: this fund has been managed by Giles Hargreave and his very experienced team of small-cap specialists at Hargreave Hale for more than 12 years. The most diversified of the four funds, it has an emphasis on Aim and the smaller end of the small-cap market.

2. Investec UK Smaller Companies: manager Philip Rodrigs uses Investec's quantitative process to help identify attractive names and remove behavioural biases. The fund invests at the smaller end of the small cap market compared to many peers in the sector, and maintains a significant exposure to the AIM market.

3. Old Mutual Select Smaller Companies: this very experienced small and mid-cap focused team led by Dan Nickols, looks to identify stocks out of line with consensus and buy where a re-rating looks likely. The team uses a macro framework to form a view on where to position the portfolio and search for ideas.

4. Standard Life UK Smaller Companies: this is very much a growth-orientated small cap fund run within a very well resourced team and company. Managed by Harry Nimmo since its inception in 1997, the fund seeks to identify the large cap names of the future and hold them for the long term.

Finally, Fidelity has just launched the UK Opportunities Fund. This fund has 80% of its exposure to small caps, and will certainly be on my radar.