Questor: buy this smaller companies trust for exposure to Europe’s fastest-growing firms

But there is a case for including both types of fund in a balanced portfolio in order to improve diversification, while adding exposure to the growth prospects that smaller companies offer.

Smaller companies may offer even better opportunities for outperformance in future because a change to brokerage regulation is likely to result in them being less researched. This could see more stocks being mispriced.

One investment trust focused on smaller European stocks is Montanaro European Smaller Companies, which Brewin Dolphin, the wealth manager, holds on behalf of some of its clients.

John Moore, of Brewin, told Questor: “Europe has been a challenging place to invest in recent years, thanks to developments such as QE from the central bank, the backlash against Angela Merkel, and the crisis over Catalan independence.

“The Montanaro trust has managed to navigate these tricky circumstances pretty well. The next few years could be difficult in other ways, of course, but we feel that the portfolio’s investment process has been validated by its recent avoidance of some of the elephant traps thrown in its way.”

He said the trust had a bias towards “quality” stocks – those with low debts and the ability to make sustainable profits that are delivered as cash. This should stand it in good stead if economic conditions do change.

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“The very fact that few investors choose European smaller companies creates an opportunity,” Moore said. “However, after years of producing annual returns of about 13pc you wouldn’t expect them to be exactly cheap.” Instead they tend to trade at multiples of about 16 times earnings.

Moore’s firm typically holds about 5pc-7pc of a client’s assets in European shares, assuming a medium attitude to risk, with as little as 1pc in smaller European stocks. “Even a 1pc holding can make a difference, given the effect of compounding if 13pc returns are maintained, but only if you hold for the long term, such as 10 years,” he added.

Montanaro European Smallers currently trades at an appreciable discount of 14.2pc, although Moore cautioned against buying the trust on the expectation that the discount would narrow, saying it reflected the relative lack of demand for smaller European stocks and the fact that they could be illiquid.

Questor says: buy

Ticker: MTE

Share price at close: 865p

Update: Pershing Square

Pershing Square, one of Questor’s poorest performers, has announced the results of its “tender” offer. It will buy back shares offered for repurchase at $13.47 (997p at the current exchange rate), a 20.5pc discount to the portfolio’s net asset value (NAV) on May 9, the reference point for the buyback.

The shares now stand at 975p, a discount of 22.1pc.

Shareholders whose shares are repurchased have effectively done remaining investors a favour: by accepting a discounted price for their shares they have increased by 2.1pc the net asset value attributable to those that remain in issue, the trust said.

Analysts at Jefferies, the broker, said: “With NAV performance broadly back on an even keel in 2018 so far, Pershing Square is well placed to make inroads over the remainder of the year.” However, they acknowledged that investor sentiment towards the fund remained “lamentable”. Hold.

Investment trust news

Scottish Mortgage has said it intends to make greater use of gearing (borrowing to invest). Artemis Alpha’s board has proposed that the portfolio become more concentrated, that continuation votes be replaced by tender offers every three years, and that the dividend should rise by more than inflation each year. Blue Capital Alternative Income proposes to wind itself up.