Questor is reiterating its tip for Montanaro UK Smaller Companies – and flagging a contrarian buying opportunity for UK small-cap funds in general – after a significant investment in the shares by its fund management company.

Montanaro Asset Management Limited (MAML), a smaller companies specialist overseeing £3.7bn of investors’ money, last week notified the stock market that it had lifted its stake in the £170m investment trust to 6pc from its previous long-standing level of 5pc.

This was not a ‘skin in the game’ trade by the fund manager or its staff. Charles Montanaro, who founded the firm in 1991 and who has run the UK smaller companies trust for most of its 29 years, already owns around 2.5pc of the shares for himself and his family.

Cedric Durant des Aulnois, a Montanaro portfolio manager, said this was a “balance sheet investment” by MAML, not driven by end-of-tax-year financial planning. He said it was designed to signal the group’s conviction in the portfolio which has delivered an impressive 544pc total return since launch in 1995.

However, shareholder gains have dwindled over five and 10 years with the stock down 22pc over three years compared to a 4.9pc decline in the Numis Smaller Companies index. This is caused by an unprecedented investor flight from the UK stock market, coupled with the market moving away from the quality growth stocks Montanaro holds to cheaper, more economically exposed ‘value’ stocks as interest rates rose.

The £1.7m investment lifts MAML’s stake to £10.2m and pushes it to fourth place in the list of long-term shareholders dominated by wealth managers and pension funds.

Their loyalty has been striking given the slump in the share price. At 101.5p, the shares stand just above the 99.2p level at which this column tipped them in August. However, they have tumbled from a peak of 182.5p in September 2021 after the Bank of England ended its near-zero interest rate policy with the fastest series of hikes in three decades in a panic over inflation.

We flagged the trust again in September as a ‘standout bargain’ when the shares slipped 9.5pc below the value of its 35 stocks, alongside other lowly, but attractively priced small-cap rivals from Aberforth (ASL), Invesco (IPU), Henderson (HSL) and BlackRock (BRSC).

The Montanaro trust gained over 8pc in the fourth quarter of last year as hopes of interest rate cuts buoyed its holdings, such as Marshalls, the landscaping products manufacturer that is its largest position at 5.2pc of the portfolio.

This year the shares have drifted with the discount to net asset value widening to nearly 15pc amid uncertainty over when the Bank of England will start to cut base rate after pausing at 5.25pc last August.