Nimmo (pictured), who runs the sector-leading Standard Life UK Smaller Companies fund, says that having to pay a premium to the market obviously has its drawbacks, but believes the best managers deliver both strong returns and the stability and safety that it is difficult to get via a value approach. He says that although buying undervalued stocks can give a fund an instant boost in the short-term, he prefers to take a longer term view.
"Value investing is certainly a valid approach, but I think it is more difficult," he said.
"It certainly means that you have more sleepless nights as there’s always the chance that the company which says it has loads of assets doesn’t, or has loads of assets but can’t make any profits on them."
"Value investors will do well in the early stages of a company’s recovery, because a lot of the time you are buying something that has bombed out."
"However, when you get past that stage it is all about staying power, so some value investors can fall away."
"There are some very good value investors, for instance I think Aberforth UK Small Companies is an excellent fund."
"However, value investors with small caps can spend years in the wilderness and you have to make sure your clients are willing to stick with you."
"I am always a little wary of analysis trying to prove that value investing is better than growth, to be honest," he added.
Nimmo has managed the £1.1bn Standard Life UK Smaller Companies fund since its launch in 1997.
According to FE Analytics, the fund is the fifth-best performing fund in the IMA UK Smaller Companies sector over 10 years, with returns of 419.57 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
It is also a top-quartile performer over three and five years.
Although the fund dropped into the third quartile in 2009, 2011 and 2012, the only year Nimmo’s fund has been a bottom-quartile performer over the last decade was in 2003 – but it still made 30.36 per cent in that 12-month period.
Nimmo says his growth approach has meant he has been less volatile than his peers over the medium- to long-term.
He says his process is not just simply identifying companies that have and can grow, but also that have clear visibility of earnings, a unique product and the ability to adapt to a changing market.
"The key to it is that it isn’t growth, per se, but the quality and visibility of that company’s growth."
"If a company is not a proven business and in a loss-making position, you have no clear idea of its future," he said.
"One of the reasons why research comparing growth versus value shows that value outperforms is because within the growth, you get a lot of blue-sky companies."
"The best way of analysing a stock is gaging a company’s quality and visibility of earnings when it is profitable."
"We do use a screening process where we look at the price of earnings momentum, because there are so many to choose from in small caps – we don’t want to be wasting our time."
"Then we like to meet the companies," he added.
A company’s relationship with its investors is a key aspect, Nimmo adds.
"We look at the company’s pricing power and its ability to maintain its price and service. However, that can all depend on the customer base. If it has thousands of customers it is in a better position to raise prices," he said.
"However, if there is a business that has just a few larger customers – maybe a business that supplies components to supermarkets – the customer dictates the pricing power."
"They may say, 'we will pay you 10 per cent less than we did last year', which is obviously not good for sustainability."
"There are generally more sustainable growth businesses out there than you think," he said.
"Normally, investors think that if a company has high profit margins then there will be loads of competitors rushing in to take the market share."
"However, there are a number of companies where that is just not possible."
Nimmo says that the use of the internet has meant some companies now have very high barriers to entry.
For instance, the online retailer ASOS – what he calls his best ever investment – was trading on premium to the market when he bought it even though he says it could have been seen as "risky". However, due to its position in the market and its use of the internet it was able to consistently outperform its forecasts.
The manager thinks Hargreaves Lansdown can be viewed in a similar way: "A good case in point is Hargreaves Lansdown, which again today came out with a strong trading statement and is up around 5 per cent."
"It is a highly rated and highly profitable company, which is a platform and information-rich."
Nimmo recently said that contrary to popular opinion, Hargreaves Lansdown is likely to profit from the Retail Distribution Review (RDR), which was introduced at the turn of the year.
Since then the stock is up just over 38 per cent. The only FTSE 100 company that has returned more is easyJet, according to FE data.
Hargreaves Lansdown is Nimmo’s second-largest position in his Standard Life UK Smaller Companies fund, making up 4.9 per cent of AUM, while ASOS is his third-largest, accounting for 4.6 per cent.
Standard Life UK Smaller Companies is soft-closed to new investors; however it can be accessed via fund platforms. It has an ongoing charges fee (OCF) of 1.69 per cent.