The FTSE All-Share had an exceptional 2025 with the market rallying by 24%, but this recovery still has a long way to run, according to Anthony Leatha, head of investment companies research at Peel Hunt.

This headline rise masks significant dispersion within the index, as larger companies led the way, but more domestically sensitive small and mid-caps were hampered by volatility at home. For example, the FTSE 250 was up just 13%, and the Deutsche Numis Smaller Companies ex investment companies were up 12.7% by comparison last year.

“It can still be very hard to form a bullish outlook on the UK stockmarket, let alone the economy,” Leatham noted.

“The UK market appears to be at an inflection point, following the disruption of high inflation and rising interest rates. Valuations, particularly further down the market cap spectrum, are undemanding and cheap relative to other developed markets, in our view, and M&A continues to be a feature.”

This will provide a supportive backdrop for a sustained rally in mid-cap and small-caps, according to Leatham. To play on this, the team favours a “basket” of three UK investment trusts: Fidelity Special Values, Mercantile Investment Trust, and Aberforth UK Smaller Companies.

Fidelity Special Values

Fidelity’s contrarian all-cap focus pairs well with Mercantile’s quality and mid-cap emphasis, while Aberforth stands out for its focus on the value end of the small-cap market, Leatham said.

“In aggregate, this creates a basket with probably a mid- and small-cap bias, a slight value bias and a high sensitivity to any further recovery.

“It’s not an equally balanced portfolio, but together they tick a lot of boxes and make for a good way of playing on the UK market.”

He praised Fidelity Special Values manager Alex Wright for his “quite contrarian” approach, with a focus on under-researched small and mid-caps.

The FTSE 250 represents 36.5% of the asset allocation, and the FTSE Small Cap represents 9.2%, which are overweights compared to the FTSE All Share. Meanwhile, FTSE 100 companies represent 41.9% of the portfolio, a relative 45.7% underweight compared to the index.

“FSV has proven its capability to outperform the FTSE All-Share benchmark through various market conditions, and the actively managed, contrarian portfolio provides access to a recovery in UK equities.”

According to FE Analytics, Fidelity Special Values has been the top trust in the IT UK All Companies sector over the past one, three, five and 10 years. Leatham added that on a NAV basis, it has even beaten the US Nasdaq over the past five years (111% vs 100%).

Mercantile Investment Trust

For Mercantile, Leatham pointed to its well-resourced team, with 20 equity analysts and managers doing more than 400 company meetings per year.

The managers focus on companies with “distinct competitive advantages” such as innovative business models, growing markets and attractive valuations.

“When we speak to the managers and talk through the lifecycle of a particular holding, the approach is active, dynamically adding and trimming positions following the initial purchase to take advantage of share price movements as the investment thesis plays out,” Leatham said.

Over the past decade, the strategy rose 92.3%, outperforming the average peer in the IT UK All Companies sector by almost 10 percentage points.

Leatham also highlighted the yield (currently 3.1%), which the team has maintained or increased each year since 1992, making it one of the AIC’s next-generation dividend heroes.

Aberforth UK Smaller Companies

Meanwhile, Aberforth UK Smaller Companies is a “dedicated value strategy” which is unusual in the IT UK Smaller Companies sector, a traditionally growth-focused universe, according to Leatham.

In 2025, the strategy delivered a 10.8% return, trailing the sector average and the Deutsche Numis Smaller Companies. Leatham attributed this mostly to macro uncertainty, such as tariffs and UK fiscal/government concerns, weighing on more domestically sensitive stocks.

While this was disappointing, the asset class is full of “pent-up potential” that could be unleashed if the macro environment improved, such as through more rate cuts.

The trust would also benefit from M&A activity, with around 15% of the holdings having been subject to M&A interest in recent years, which could help push NAV higher, Leatham said.

Valuations also seem supportive, with UK small caps trading on a “material discount” to the broader market. The trust trades even cheaper, with the portfolio on a 26% EV/EBITDA discount to its benchmark, a modified version of the Deutsche Numis Smaller Companies index.

Leatham concluded: “In our view, ASL’s value style should be in a good position to benefit from further interest rate cuts in the UK, as well as an improvement in the growth outlook.”

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