Europe’s hidden growth engines: Rory Stokes on what’s next for small caps

At the recent AIC Investment Showcase event, Rory Stokes, deputy fund manager at The European Smaller Companies Trust, discussed the current landscape of the European small cap market and how the trust looks beyond the obvious to find value in often overlooked smaller companies in the region.

Discrete year performance (%)	Share price (total return)	NAV (total return)
30/09/2024 to 30/09/2025	25.0	18.8
30/09/2023 to 30/09/2024	25.9	17.7
30/09/2022 to 30/09/2023	21.4	18.6
30/09/2021 to 30/09/2022	-29.6	-25.6
30/09/2020 to 30/09/2021	56.8	46.8

All performance, cumulative growth and annual growth data is sourced from Morningstar.

Source: at 30/09/25. © 2025 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance does not predict future returns.

Glossary

Balance sheet

A financial statement that summarises a company’s assets, liabilities, and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Cyclical stocks

Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as mining.

Discount/premium (investment trusts)

The amount by which the price-per-share of an investment company is either lower (at a discount) or higher (at a premium) than the net-asset value per share (cum income), expressed as a percentage of the net-asset value per share.

Dividend

A variable discretionary payment made by a company to its shareholders.

EBITA

Earnings before interest, taxes, and amortization (EBITA) is a non-GAAP profitability metric that investors can use to determine the value of a business.

Fiscal/Fiscal policy

Describes government policy relating to setting tax rates and spending levels. Fiscal policy is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.

Gross domestic product (GDP)

GDP is a measure of the size and heath of a country’s economy over a specific period, usually either quarterly or yearly.

Large caps

Well-established companies with a valuation (market capitalisation) above a certain size (e.g., $10 billion in the US); it can also be used as a relative term. Large-cap indices, such as the UK’s FTSE 100 or the S&P 500 in the US, track the performance of the largest publicly-traded companies rather than all stocks above a certain size.

Liquidity/Liquid assets

Liquidity is a measure of how easily an asset can be bought or sold in the market. Assets that can be easily traded in the market in high volumes (without causing a major price move) are referred to as ‘liquid’.

M&A (mergers and acquisitions)

Mergers and acquisitions is a term used to describe businesses combining through different types of transactions.

Magnificent Seven (MAG 7)

The term ‘Magnificent Seven’ refers to the seven major technology stocks—Apple, Microsoft, Nvidia, Amazon, Tesla, Alphabet, and Meta—that have dominated markets in recent years.

MSCI World Index

The MSCI World Index captures large and mid cap representation across Developed Markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

Portfolio

A grouping of financial assets such as equities, bonds, commodities, properties, or cash. Also often called a ‘fund’.

Price-to-earnings (P/E) ratio

A popular ratio used to value a company’s shares compared to other stocks or a benchmark index. It is calculated by dividing the current share price by its earnings per share.

Share buybacks

Where a company buys back their own shares from the market, thereby reducing the number of shares in circulation, with a consequent increase in the value of each remaining share. It increases the stake that existing shareholders have in the company, including the amount due from any future dividend payments. It typically signals the company’s optimism about the future and a possible undervaluation of the company’s equity.

Small caps

Companies with a valuation (market capitalisation) within a certain scale, e.g. $300 million to $2 billion in the US, although these measures are generally an estimate. Small-cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.

Valuation metrics

Metrics used to gauge a company’s performance, financial health, and expectations for future earnings, e.g. P/E ratio and ROE.

Important information

There is no guarantee that past trends will continue, or forecasts will be realized.

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Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.

Specific risks

If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries.
Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
Most of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell, and their share prices may fluctuate more than those of larger companies.
This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
Using derivatives exposes the Company to risks different from - and potentially greater than - the risks associated with investing directly in securities. It may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.

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