Overall, fund managers from the UK Smaller Companies sector have managed to overcome the summer’s volatility, with Standard Life’s Harry Nimmo leading the way
The past year has marked the return to form of Standard Life Investments’ Harry Nimmo in the UK Smaller Companies sector .
The average return for UK Smaller Companies fund managers in the 12 months to the end of November has been 21%. This is an impressive figure, given the sector bore the brunt of the sell-off in equities during the volatility this summer, which is reflected by an average fund loss of 0.75% in the six months to August.
The top ten managers in the sector over the last 12 months all delivered a positive return in this first six-month period. The sector’s best performer, Harry Nimmo, returned 2% which contributed to a return of 40.3% over the 12 months.
Nimmo, who is AAA-rated by Citywire, has employed the same investment process in his 10 years at the helm of the fund in his bid to smoke out companies with sustainable business models. A stock-screen, which highlights the potential for earnings revisions, director dealings and prospective P/E ratios and dividend yields aids the process.
Nimmo’s conservative approach to investment tends to perform better in softer markets. In April he shrewdly increased the fund’s cash position from 1% to 5% just before the volatility struck markets in May.
Nimmo says the small-cap sector still has its attractions, even though strong performance in recent years has seen it hit its highest valuation levels since the 1980s.
He explains: ‘The composition of smaller company markets has changed substantially and as such, I believe they continue to offer investors an important source of additional return. They also provide an opportunity to invest in tomorrow’s larger companies, today.’
Nimmo does not believe underperformance in smaller companies is just around the corner simply because the sector has enjoyed such a strong run recently.
He says: ‘The structure of smaller company markets, as measured by sector exposure, is very different to the picture in the early 1990s. In those days, nearly one- third of smaller companies were exposed to UK-based manufacturing companies largely in textiles, engineering, chemicals and packaging.
‘These companies were facing the full onslaught of overseas competition from countries with cost bases that the UK could not match. Genuine growth sectors constituted a comparatively small part of the whole market picture.’
Nimmo says the picture is much healthier today. He highlights that UK-based manufacturing is now a minor part of the smaller companies index due to the growth of IT, support services, healthcare, leisure and speciality financial sectors.
Stocks which have caught Nimmo’s eye in today’s market include online business information firm Datamonitor, council house refurbishment group Connaught, engineering design software firm Aveva and self storage firm Big Yellow.
Meanwhile, Old Mutual Asset Managers’ (OMAM) AAA-rated Dan Nickols was one of the sector’s best performers during the summer volatility, returning 3.3% on his UK Select Smaller Companies fund. (Old Mutual UK Select Smaller Companies Acc) His total return for the 12 months was 35%, ranking him second in the sector.
Nickols is also one of only two managers to beat the sector average in each of the last five discrete years. His aggregated return in this period was 168%.
AA-rated Simon Knott, manager of the Discretionary unit trust, (Discretionary Disc) was the other manager to pass the test.
Nickols’ performance has been bolstered by exposure to support services, where he identified a number of opportunities resulting from the ongoing re-rating structural growth stocks have experienced.
He has also benefited from positions in healthcare stocks, which rallied on the back of the growth of outsourcing-driven opportunities in the sector. He has also found compelling ideas on a stock-specific level in the aerospace sector.
In the summer’s volatility, Nickols moved to cut the risk out of the portfolio. The key shift was the selling of his overweight position in cyclical industrial areas to a marginal underweight. He also increased his cash position to slightly above the 5% he typically works with until the volatility died down.
Last month OMAM hard closed Nickols’ fund in a bid to protect its strong performance.
It has also been a good month for Ian McCombie. His Baillie Gifford British Smaller Companies fund, (Baillie Gifford British Smaller Companies Inc A) which targets firms with strong earnings and cashflow growth characteristics, has returned 33.25% over the past year, placing him in third spot.
Paul Marriage, manager of the Cazenove UK Smaller Companies, (Cazenove UK Smaller Companies A Inc) and Bill Barker, manager of the Threadneedle UK Smaller Companies fund, (Threadneedle UK Smaller Companies Growth C1) have also impressed with returns of 30.1% and 30% respectively over the year.
On a gloomier note, life continues to be tough for former AAA-rated manager Paul Jourdan. He was the fifth worst performer in the sector on the back of a return of just 3.5% on his First State British Smaller Companies fund (First State British Smaller Companies A) for the year. It is the second successive 12-month period Jourdan has been ranked bottom quartile.
Canada Life’s Craig McDougall was one of only two managers to lose money over the 12 months. His CF Canlife UK Smaller Companies fund (CF Canlife UK Smaller Companies) fell by 2.8%. This represents the third consecutive year McDougall has failed to beat the sector average.
The other manager to post a loss was Alistair Currie, who lost 0.8% on his Premier UK Smaller Companies fund. (Premier UK Smaller Companies)