The timing of Mark Niznik’s move to Artemis in 2007 was unfortunate.
The small cap manager had brought a stellar track record with him from a 10-year period split between Invesco Perpetual and Standard Life Investments.
As Niznik set about stamping his authority, the Lehmans disaster struck, and a quartet of holdings in unquoted energy companies – Vostok, Hurricane Energy, Central Asia and Ophir - became a problem. At their peak exposure, these stocks accounted for 18% of the fund and according to Niznik they wiped around 30% from performance.
‘The fund was doing really well under John Dodd and was the best performer in its sector over 10 years,’ Niznik told Citywire Scotland. ‘We didn’t see the credit crunch coming and during the transition to my way we got hammered.’
Thanks to the recent rally in small caps, investors who stuck with the fund have seen returns of 148.9% over the last five years, although this is below the peer group average of 166.5%. Niznik, who was rated by Citywire for 25 consecutive months from June 2005, has not regained his rating since losing it in August 2012.
He does not regret taking the challenge and with only a small holding in Hurricane remaining of the four he is far more comfortable with the portfolio’s construction. ‘Artemis is the best place I have worked at and I wouldn’t swap it for any other job. John [Dodd] has been brilliant and I believe the struggle is now behind us.’
As someone who likes to keep risk low, Niznik was also hit by the rally in small caps. ‘When markets are zooming, it doesn’t fit my style. I’m one of the most cautious managers in my sector and am likely to struggle when markets are rampant,’ he said.
Niznik believes what distinguishes him from his peers is his extensive qualitative research in the hunt for firms with strong franchises and free cash flow yields.
‘I’ve been doing this job for 30 years and believe my edge is being able to interlace my connections to find the best opportunities,’ he said. ‘I’m not necessarily super-bright, just super-diligent.’ By way of demonstration, Niznik opened an iPad holding notes on some 4,500 meetings he has conducted while at Artemis.
Screaming Brooks buy
One company featuring heavily in this archive is Brooks Macdonald, which at 2.8% is the £379 million fund’s second biggest holding. After his last meeting with the firm in March and the subsequent decline in its share price, Niznik believes Brooks offers an excellent opportunity relative to its sector.
‘Brooks shares are down 10% over the last month and If I didn’t own them already I’d buy them. It’s a screaming buy. Rathbones and Brewin Dolphin have a higher rating, yet Brooks’ organic growth of more than 15% is more than double [its competitors],’ he said.
‘When I saw Brooks in March, the funds linked to clients they are signing up is at the highest ever. People were worried that post-retail distribution review, Brooks’ money flows would decrease, but they have increased. While I have holdings in both Rathbones and Brewin, which are also cracking businesses, I think there is better relative value in Brooks.’
Niznik’s top holding is vet firm CVS, which accounts for around 3%.
‘CVS owns between 10-12% of the share of a fragmented market, 70% of which is dominated by family businesses. This share could rise to 20% rapidly,’ he said.
‘It has also got big enough to do its own branded stuff rather than buy stock from the big pharmas. This allows CVS to offer its products cheaper, while taking a bigger margin for itself.’
So after the small cap rally, does the inherently cautious Niznik believe things are going to be much tougher for his asset class?
‘My gut says after a strong run you should cut back. However, valuations remain attractive based on higher earnings growth and small caps are only on a small premium to large caps – they are not pre-Lehmans levels,’ he said.
‘My gut is saying bank profits but the stats are saying there is no valuation bubble. Now may not be the best time to buy small caps but I still have all of my own money in the fund. Over the long term I remain happy with my exposure.’