Whilst the manager of the £1.25bn Standard Life UK Smaller Companies fund believes he will outperform the average return in the IMA UK Smaller Companies sector over this period, he says an unusually strong bull market won’t be repeated over the medium to long-term.
“We are seeing volatility in both directions off the back of a smaller companies market that has been in a bull market for the past five years and an economy that has been recovering very sharply for several years too,” he said.
“Our returns over the past five years have averaged 22 per cent a year and the index has averaged 20.5 per cent a year. That level of return is not warranted in a normal market. Things may have been overcooked in the downside of 2009 but that is a pretty spectacular five year run.”
“I think returns from my fund will probably be nearer 10 per cent per annum for the next five years but the index will be slightly less than that. However, this will look good compared to the FTSE 100 but it’s very difficult to see the market being quite as strong as it has been over the past five years.”
Despite expecting a slower market, Nimmo says he is optimistic for the stocks he is currently holding in the fund, which he says will stand up in a slower market better than most.
“This environment is quite a good one for the fund,” he said. “There will be some sort of economic slow-down in a response to rising rates so ultimately that is good for us because our companies are very resilient and tend to grow regardless of the economic cycle.”
According to FE Analytics, the fund is still ahead of the average return in the sector over five years, but by less than one percentage point. It has returned 146.64 per cent compared to a sector average of 146.03 per cent.
Performance of fund and sector over 5yrs
Source: FE Analytics
Whilst Nimmo has a top quartile record over the past 10 years, he has recently under performed with his fund now bottom quartile in 2014, so far, having lost 11.01 per cent. It is the worst performer over this period of 53 funds in the sector.
The sector average in 2014 has been a loss of 1.57 per cent.
Performance of fund and sector in 2014
Source: FE Analytics
The manager has outperformed the sector average in seven of the last 10 full calendar years. Two of the years, 2011 and 2004, the fund underperformed by less than 1 percentage point.
However, in the past three full calendar years the fund has been placed in the third quartile.
The funds have been hard hit by the recent downturn in tech and smaller company stocks and are now fourth quartile over three years.
Nimmo recently told FE Trustnet he had recently sold completely out of his best ever performing stock – ASOS – after a sustained period of underperformance. The stock is down more than 50 per cent since the beginning of 2014.
He says the recent underperformance of his stocks has been partly due to an increased shorting of the type of stocks he buys by hedge funds and absolute return funds.
“At the moment markets are heavily influenced by the activities of ETFs, derivatives, but particular by multi-asset, absolute return and global hedge funds who take views on top down trends. They might short growth stocks they see as early cylicals.”
“With the rise of absolute return funds and passive funds there is far more top down volatility responding to perceived changes in the macro environment.”
“Passive funds tend to augment their revenues by aggressively lending stock and because they are long term holders of shares and indices, if they can lend stock they can make an extra return on their clients’ money.”
“I strongly believe that is what has happened recently because a good number of our largest holdings have fallen totally at variance with their current trading. They are trading very well but they are being sold off for other reasons.”
Eight out of 10 of the manager’s top 10 holdings on 30 April, the date of the last factsheet available, are down since the beginning of the year, including ASOS.
Performance of stocks in 2014
Source: FE Analytics
However, the stocks that have appreciated over this period, Workspace Group and Paypoint are both up more than 11 per cent. They hold the same weighting in the portfolio, making a total of 6.2 per cent.
Nimmo says he believe that the underperformance of these stocks will be very short lived and says a turnaround is imminent.
“For longer term investors who can see through the short term macro trends it is a buying opportunity for them,” he said.
