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Sectorwatch: Clark is the new sheriff in town

Resolution Asset Management’s David Clark has knocked Standard Life Investments’ Daniel Nickols off the top spot in the UK Smaller Companies sector.

Clark posted an impressive return of 32.85% on the £121 million ResolutionAsset Smaller Companies fund .

As a whole, the sector has provided rich pickings for investors, with the average manager posting a return of 17.45% (as with all data here, this is over the 12 months to 30 April, ignoring the effects of initial charges with gross income reinvested at the payment date).

Claiming second spot, Daniels Nickols posted a 30.62% return on the £554 million Old Mutual UK Select Smaller Companies fund (Old Mutual UK Select Smaller Companies Acc). Nickols, who was Citywire’s Top 100 Fund Manager of the Year 2007, said that his success is down to the strength of his five-strong team headed up by A-rated Ashton Bradbury.

Nickols describes his approach as neither growth nor value, and despite being a bottom-up stockpicker, he has an interest in macro-economic themes.

From 2005 through to 2006, Nickols gradually repositioned his fund towards stocks less affected by slowing GDP growth.

He says: ‘The trend has been from economically sensitive stocks towards secular and structural growth stories.’

These areas, including healthcare, are less affected by the economic cycle. At any one time, Nickols has around 40-50% allocated to what would classically be termed mid-cap stocks.

Just behind Nickols in third place is Standard Life Investments’ AAA-rated Harry Nimmo who runs the firm’s £302 million UK Smaller Companies fund (Standard Life UK Smaller Companies-Life). Nimmo, who was second place in the sector for the corresponding period last year, posted a return of 30.10%.

Nimmo told Citywire he had profited from the growth of IT, support services, healthcare, leisure and specialty financial sectors in the small-cap arena.

Stocks which Nimmo has benefited from over the last 12 months include online business firm Datamonitor, council house refurbishment group Connaught, storage firm Big Yellow and software firm Aveva.

In fourth place is AA-rated Simon Knott, a veteran small-cap investor, who posted a return of 27.47% on the £71 million Discretionary Unit fund (Discretionary Disc), which he has run since 1990.

Knott attributes his strong performance to his long-term investment approach on the 40-stock portfolio, which has a notably low turnover.

He says: ‘My selection process has remained the same for the last 17 years. I am a deep value investor and stick with stocks if they continue to do well.’

Knott says the continuation of that approach pushes him towards being more of a momentum investor and he stands by a rigid portfolio construction.

‘My fund has seen little change over the last three years. My top 10 stockpicks account for over 40% of my fund, while my top 20 accounts for 65-70%.’

Knott says: ‘Over the last seven or eight months I have had a string of good stocks and very few bad ones in the fund. I try to keep the error rate down to under 10%.’

While Knott’s fund is the result of pure bottom-up stockpicking, he says contractor-related stocks have done well recently with strong returns achieved from ground engineering specialist Keller Group, insulation firm SIG, construction firm Henry Boot and Hill Smith & Brown.

The support services sector currently makes up over 20% of Knott’s portfolio and has produced strong performers, although Knott says most of the stocks held in the sector are uncorrelated.

He singles out generator hire firm Aggreko, fluids distributor Brammer, environmental consultancy RPS Group and consulting engineering group White Young Green.

Knott says around 10% of the portfolio has been subject to takeover activity over the last year, including household product producer Mayborn Group, UCM Group and, more recently, Reliance Security.

He says 85% of the stocks held are from the main index with the remaining 15% comprised of AIM stocks.

‘I currently hold eight or nine companies that have moved down. Less than 5% of my portfolio has been brought directly from AIM.’

Three such stocks which have performed well for Knott include Medical supplies firm Scapa Group, satellite tracking device producer Intelek and lift control manufacturer Dewhirst.

The fund’s largest holding is a 7.75% stake in Knott’s own Rights and Issues investment trust.

Knott says: ‘It is an entirely passive holding, otherwise it would represent too big a conflict of interest, but it is currently justifying its place in the fund.’

Knott says some of his present holdings have been in the fund for five to 10 years and believes his long-term investment approach contributes to the relatively low volatility in the fund.

In fifth place is Baillie Gifford’s Iain McCombie who returned 25.99% with the £500 million British Smaller Companies fund, while Credit Suisse Smaller Companies (Credit Suisse Smaller Companies Retail)manager Stuart Harris claimed sixth spot with a return of 25.74%, although he is due to join the firm’s Asian equities team shortly.

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