But when I talk to young people who are just starting out and have decades of investing ahead of them, they tend to think that’s a bit boring and want some excitement from growth opportunities. And I think that’s fine, as they can spread the risk out over time.

One approach is to look for companies with great potential, which have yet been realised. And that, as it happens, sums up Caledonia Investments (LSE: CLDN). As well as holding some big international stocks, the investment trust also looks to acquire smaller companies with growth potential and then puts in the effort to achieve it.

Cracking return

On Tuesday, the firm announced its most recent success after the sale of Choice Care Group, a provider of residential services for people with learning disabilities and mental health conditions. The disposal of its 87.4% stake has netted Caledonian £99.4m in cash (including pre-sale dividends of £7.1m).

Considering it paid £49.5m initially for it, invested a further £5.4m in the business, and has also received earlier dividends of £6.1m, that looks like it’s been a canny deal. In fact, it represents an internal rate of return of 14.3%, and a money multiple of 1.9 times. That’s a top result.

The proceeds will be put towards repaying cash drawn under the company’s loan facilities for the acquisition earlier this month of Deep Sea Electronics, an electricity generator and intelligent battery charger specialist.

Caledonia’s dividend yields are modest at around 2%, but it’s raised its dividend for 51 years in a row now. The shares are currently trading on a discount to net asset value of 24%, even after gaining 40% in the last five years.

Go for growth

Another way to spread the risk of going for smaller growth companies is to buy an investment trust that specialises in them. So I do like the look of the Standard Life UK Smaller Companies Trust (LSE: SLS).

As it says on the tin, the trust invests in smaller companies in the UK, looks for growth, and seems to be rather good at it.

A share issue related to the reconstruction of the Dunedin Smaller Companies Investment Trust has led to a fall back in the share price since early October, but we’re still looking at 46% share price appreciation over the past five years, compared with the FTSE 100‘s meagre 5% gain.

Some dividends

And though the trust is firmly chasing growth, it’s still paying a modest dividend too, which has been yielding around 1.5-2% in recent years.

What an investment trust like this relies on is having a good manager and, as my colleague Rupert Hargreaves has pointed out, in Harry Nimmo they have one of the top smaller-companies experts in the business.

At 9.5%, the trust is trading at a smaller discount to some of its peers, but after the recent share price dip, I reckon that makes it look like pretty good value.

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This is why small-cap focused investment trusts are a great tool for investors who want to benefit from small-cap growth but don’t have the time or experience to do the work themselves.

Returns of 1,000%

Standard Life UK Smaller Companies (LSE: SLS) has chalked up one of the best records around when it comes to small-cap investing. Over the past five years, the trust has produced a total return of 115% for investors, compared to its benchmark (UK Smaller Companies) return of 107% over the same period.

The trust’s manager, Harry Nimmo is somewhat of a legend in investment circles having managed the Smaller Companies Fund since 2003, achieving a total return for investors of nearly 1,000% since the beginning, which makes him even more successful than City grandee Neil Woodford. 

Nimmo likes growth companies, so you won’t find any value investments in his portfolio. He likes to own shares that have performed well and continue to produce returns such as First Derivatives and NMC Health, two of the fund’s top 10 holdings.

The one drawback of the Standard Life UK Smaller Companies is that it is relatively expensive with a total ongoing cost to investors of 1.1% per annum, and its dividend yield leaves much to be desired, currently standing at 1.3%. Nonetheless, after considering the company’s historic performance in the small-cap sector, I believe that this is a price worth paying to invest alongside Nimmo.

Value focus 

Another small-cap focused trust that’s smashed its benchmark return over the past five years is the Invesco Perpetual UK Smaller Companies (LSE: IPU). Jonathan Brown manages the portfolio here, and once again he’s been at the helm for well over a decade since starting in June 2002. Over the past five years, the firm has returned 139% for investors, compared to the benchmark return of 107%.

And as well as this stronger performance, the trust is also attractive to income investors as it currently supports a dividend yield of 3.4% and its portfolio is more value-focused with Coats and Johnson Service featuring in the top five holdings. With a total ongoing cost of 0.8% per annum, the Invesco offering is also cheaper than Standard Life’s.

That being said, while Invesco might look like the better offering based on short-term performance, over the long-term its performance is less appealing. Over the past decade, the trust has produced a total return for investors of 231%. Meanwhile, Nimmo and team have returned 327% over the same period, excluding dividends.

However, past performance is no guarantee of future returns and either trust would make a great addition to any portfolio. A combination of the two would provide an instantly diversified portfolio of the market’s top small-caps.

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Nimmo and his team have a long record of picking out the market’s best small-caps and today, the portfolio is dominated by growth favourites NMC Health and Fevertreee Drinks. These two holdings comprise 9.5% of overall assets. 

Some 5% of the overall portfolio is invested in the FTSE 100, 6% in the FTSE 250 and the remainder split between the Numis Smaller Companies index and AIM. 

Proven record of success 

Investing in small-caps can be a risky business, but Nimmo has been at the helm of the Standard Life trust since 2003, a testament to his investing prowess. However, despite his market-beating record, the trust currently trades at a discount to net asset value of around 2%. Considering the company’s historic investment performance, I would argue that it is worth paying a premium for the shares, so this slight discount seems too good to pass up. 

Compared to other small-cap funds, the Standard Life offering isn’t too expensive either. Ongoing charges were around 1.1% of capital for the past 12 months. 

The one downside is that the trust only offers a dividend yield of 1.4%, although with capital gains of 40% over the past 12 months it’s easy to overlook this lack of income. 

Long term champion 

The Montanaro UK Smaller Companies (LSE: MTU) trust has only returned 69% for its investors over the last five years, but if you’re looking for a cheap play on UK small-caps, this fund could be for you. 

While the trust’s performance has disappointed over the past five years, over the long term Montanaro has smashed its benchmark with net asset value growth of 704% since launch, or 139% over the past decade. Over the same period, its benchmark (a blend of the FTSE SmallCap Index and NSCI Index) returned 435%. 

What’s more, the trust’s last reported net asset value per share was 718p, so at today’s price of 574p, the shares are changing hands at a 20% discount to the underlying asset value. 

At the end of September Montanaro’s largest holding was construction group Marshalls, followed by 4imprint and then Cineworld. Unlike Nimmo’s portfolio, Montanaro’s is more diversified. No position is larger than 3% of the total portfolio value, and the ongoing management charge is 0.8%. 

As a long-term investment, it seems to me to be a great investment. Looking at the yawning gap between the firm’s share price and underlying net asset value, it feels as if the market does not understand the potential here, which presents an opportunity for those investors who can look past short-term headwinds. 

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Trust this

The Mercantile Investment Trust (LSE: MRC) reported its results for the six months to 31 July today and gladdened loyal investors with a 16.2% return on net assets, beating 10.7% on the company’s benchmark index. The return to shareholders was 14.5%, as the discount at which the shares trade widened slightly over the half year. It also paid a total dividend of 21p, up from 20.5p in 2016.

Mercantile is managed by JP Morgan and aims to achieve capital growth through a portfolio of UK medium and small company stocks. Long-term performance has been solid, it has returned 120% over the past five years, according to figures from Trustnet.com, and 23% over 12 months. Gearing is relatively modest at 3%.

Cheap and cheerful

Management invests across a spread of sectors but with a tilt towards financial services, where its position in private equity investor 3i performed notably well. It wisely minimised its exposure to the troubled oil services sector. There is plenty of concern about the state of the UK economy but the trust’s joint managers remain relatively positive. “The economy is proving to be more resilient than had been expected and monetary policy has been accommodating. These factors combined should provide a positive backdrop for equities.”

Mercantile, which now manages a hefty £1.66bn, currently trades at a discount of 9.86%, which I find reassuring as I dislike buying trusts at a premium to net asset value. Ongoing fund charges total just 0.5% a year, and the current yield is 2.32%. Investing in this trust could prove good business.

Go Nimmo

Standard Life UK Smaller Companies Trust (LSE: SLS) is another long-standing investor favourite, and this £310m investment trust has also performed smartly, returning 29% over 12 months, and 115% over five years. That comes as no surprise when you discover it is run by smaller companies whizz Harry Nimmo, who was renowned when I first started writing about investment trusts 15 years ago, and has been running this one since 2003.

Nimmo’s biggest holding right now is Foolish favourite Fevertree Drinks, which makes up 5% of his portfolio, and has more than justified its place with its fizzy recent performance. Some 10% of the portfolio is invested in the FTSE 250, with the remainder split between the Numis Smaller Companies index and AIM. The yield is just 1.48%, more than you might expect on a smaller companies fund, but charges are higher than on Mercantile, with a total expense ratio of 1.17% a year. So far, Nimmo has been worth the money.

Think small

The trust trades at a discount of -5.43% to net asset value. Personally, I wouldn’t have been surprised if it traded at a premium, given Nimmo’s reputation. If buying individual smaller companies stocks is too risky for you, either of these trusts could do the job very nicely on your behalf. Small is beautiful

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