Standard Life Investments’ Harry Nimmo assesses the latest academic findings to reveal why it’s possible to have the best of both worlds.
Buy lower risk companies and trade less often, that’s the message from Standard Life Investments small-cap veteran Harry Nimmo. He taps into the findings of Elroy Dimson and Paul Marsh, both former professors of finance at the London Business School, to explain why patience is so powerful when investing in smaller companies.
Along with co-author Mike Staunton, Dimson and Marsh’s 2002 book ‘Triumph of the Optimists: 101 Years of Global Investment Returns’ stands out in stark contrast to the fast-paced computer-driven trading we see in financial markets today. The co-authors’ study of investment performance across asset classes delivered comprehensive evidence of the long-term equity risk premium which is now widely accepted across the investment community.
And it’s a mantra that Standard Life UK Smaller Companies Trust manager Harry Nimmo believes in. “Dimson and Marsh provided evidence that smaller companies exhibiting lower risk could produce higher returns. This flies in the face of most historic academic research that suggests that higher risk equals higher returns.” He argues that, increasingly, other academics are following this school of thought.
It’s for this reason that Nimmo focuses on hunting out lower risk companies for his portfolio.
This does not mean avoiding some volatility, as this is an inherent characteristic of equity investing. For those for investors with sufficient appetite for risk, holding on for longer has offered rewards. While the Trust has no macro overlay, Nimmo has factored the Brexit effect into his stock selection by altering his weightings in UK-orientated businesses and putting more emphasis on companies generating a larger part of their revenues abroad. “Companies with high levels of exports, or companies with higher levels of business overseas are getting higher scores in our internal screening process, this is feeding through from a weaker sterling after the Brexit vote. I would say about now about 50 – 55% of the revenues of our businesses are from outside the UK which is quite high for the Trust.”
Identifying two key advantages of his low turnover strategy, he explains:
“Our performance is not dependent on massive trading volumes - that’s very important to us. To overcome the liquidity issues in smaller companies we do two things; we invest in companies that we believe are lower risk, and we trade less often, holding stocks for five years on average.”
The smaller companies sector has tended to deliver higher growth and Nimmo believes it should sit within an overall asset allocation framework.
“I believe if investors have a long-term time horizon, five years or more, and are interested in capital growth, they should look at smaller companies as part of their capital allocation. They need to be able to cope with equity risk but, notwithstanding that, if history is our judge, while being no predictor of the future, smaller companies’ returns have exceeded those of larger companies.”
The opinions expressed are those of SL Capital as of October 2017 and are subject to change at any time due to changes in market or economic conditions.
This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice.
The value of an investment can fall as well as rise and is not guaranteed – an investor may get back less than he/she put in. Past performance is not a guide to future performance.
This article is issued and approved by Standard Life Investments Limited. Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority.
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