The manager of the £1.25bn Standard Life UK Smaller Companies fund says the key to being a successful small cap manager is identifying companies with three characteristics: growth, quality and earnings momentum. “We are not value investors in the traditional sense and we tend to hold our positions for extended periods,” he explained.
“We are not looking for blue-sky growth; we are investing in proper companies that have revenues, profits and grow their businesses and we do not invest to any great extent in concept stocks’.
“In quality stocks we are looking for the visibility and predictability of earnings as well as balance sheet strength.”
Online retailer ASOS was one that ticked the three boxes. In spite of a dreadful 2014, which prompted Nimmo to sell completely out of the stock earlier this month, it has been the biggest value adder in his fund in recent years.
The manager bought the stock at 85p a share in 2006, and was as high as £70 earlier this year. The savage sell-off has bought shares back down to £30, but investors in Standard Life UK Smaller Companies have still been major beneficiaries of its inclusion overall.
Here are three of the companies Nimmo has been buying up with the proceeds of the sale, which also fit in with his strict screening process.
Smart Metering Systems
Nimmo says he bought this FTSE 250 stock a few months ago, playing into a larger theme in his portfolio.
“There are a number of firms that aren’t major energy companies, that can benefit from rising energy prices and this is one of them,” he said.
“The company sells smart meters to both small businesses and households, helping users to be more efficient with gas and electricity.”
“There is a regulatory imperative for the devices to be fitted over the next three or four years and so there is potentially massive market penetration.”
Smart Metering Systems is currently a £200m company, but Nimmo says it could grow much bigger than this.
Since the stock was first listed, just under three years ago, it has risen rapidly by more than 400 per cent, but has fallen since the beginning of June by over 11 per cent.
Performance of stock and index since Aug 2011
Source: FE Analytics
The stock is held by seven funds in the IMA universe as a top-10 holding, including L&G Special Situations, L&G UK Alpha and L&G UK Active Opportunities. They all have between 4 and 6 per cent invested in the company.
The Old Mutual UK Smaller Companies and Old Mutual UK Smaller Companies Focus funds, run by FE Alpha Manager Daniel Nickols, have 1.7 per cent and 2.3 per cent, respectively. Star manager Paul Marriage’s Schroder UK Dynamic Smaller Companies fund has a 2.55 per cent weighting.
Big Yellow
Nimmo says he first bought the FTSE 250 self-storage company last year but has added more to it recently.
He says that the stock plays into the wider housing market theme, as people tend to have a greater need for self-storage when there is greater activity in the housing market.
“It is a very visible and trusted name and they benefit from the volume of house moves for the rental income,” he said.
Over the past three years the stock has returned 75.11 per cent; however it has also suffered during the recent small cap sell-off, losing over 11 per cent since the beginning of March.
Performance of stock and index over 3yrs
Source: FE Analytics
This three month period has seen a number of housing market-related stocks sell-off following warnings from the IMF that it is in danger of over-heating.
Big Yellow is held by only one fund in the IMA universe as a top-10 holding: the £73m Montanaro Equity Income fund, which has 2.3 per cent of its assets in the stock.
James Fisher & Sons
Nimmo recently added this niche marine services stock due to upward momentum in its price, earnings upgrades and its balance sheet strength.
“It is quite an old-fashioned business that has moved out of the small tanker haulage to offer more diversified marine services,” he explained.
“It is a specialist, offering a wide range of services to the oil and gas industry and is increasingly diversified geographically.”
“One of its most interesting subsidiaries involves people being on-call in case of the need for submarine rescue. They get called out extremely rarely but they have a lot of oil and gas and military customers around the world. There are only one or two providers of this service in the world.”
James Fisher & Sons has returned 166.56 per cent over the past three years but has also taken a recent tumble of around 10 per cent since March.
Performance of stock and index over 3yrs
Source: FE Analytics
The stock is held by seven funds in the IMA universe as a top-10 holding, including the MFM Slater Growth and M&G Smaller Companies funds, which have 2.91 per cent and 2.44 per cent, respectively.
FE Alpha Manager Andrew Brough’s Schroder UK Smaller Companies and Schroder Institutional UK Smaller Companies fund are also big holders, with around 2.4 per cent apiece.
