Standard Life UK Smaller Companies lost 0.53 per cent in the year to 30 June, FE Analytics shows, significantly underperforming the 18.67 per cent gain in its Numis Smaller Companies benchmark.Lovett Turner, associate director of investment companies research at Numis Securities, says it is “always disappointing” to see significant underperformance but it was “not wholly unexpected” given the sell-off in the growth stocks preferred by the trust.
Standard Life UK Smaller Companies has moved from trading at a premium to a 6.7 per cent discount although Numis thinks this can present an opportunity for those who believe Nimmo can return to form.
He said: “We believe this may represent an attractive entry point to gain access to an established manager with a strong long-term track record with the potential to benefit from discount narrowing if the manager can turn around performance.”
The trust was highlighted by the AIC earlier this year as being the most consistent investment trusts of the past decade after beating its sector average in nine of the past 10 years. An investment of £10,000 would have grown to £62,600 over this time.
Return on an initial £10,000 investment over 10yrs
Source: FE Analytics
Numis says the trust’s long-term track record “remains strong” with annualised net asset value total returns of 17.4 per cent over 10 years compared with the 12.8 per cent seen in the index.
Lovett-Turner also notes that Nimmo has pledged to stick with his process, which has proven successful over his tenure on the trust.
This process is momentum-based and has Standard Life Investments’ proprietary Matrix research tool, which Nimmo helped develop, at its centre.
He said: “We believe it is positive that the manager is sticking to the investment process which has generated strong returns over the long-term and has recovered strongly after previous periods of underperformance, such as 2008.”
FE Analytics shows Standard Life UK Smaller Companies IT dropped 20.89 per cent in 2008. However it returned 58.15 per cent in the following year then achieved a 70.48 per cent gain in 2010, more than double the index’s 28.49 per cent.
While not on the same scale as the 2008 sell-off, Standard Life UK Smaller Companies IT was hit very hard during the second quarter of 2014. Up to 6 March, the portfolio’s performance was roughly in line with smaller companies’ strong gains.
After this date it was hurt by the market’s reaction to Fed chair Janet Yellen’s suggestion that the central bank could lift interest rates sooner than expected.
This prompted a re-examination of risk profiles by larger investors, who then moved out of ETFs and derivatives focused on small and mid-sized companies.
Between 6 March and the end of the second quarter, the trust dropped 17.94 per cent in total return terms. This compares with a fall of just 6.99 per cent in the benchmark and an average decline of 8.54 per cent in the IT UK Smaller Companies sector.
Performance of trust vs index since 6 March
Source: FE Analytics
In the trust’s latest annual report, Nimmo (pictured) said: “After 6 March, the company suffered under the onslaught of derivative-related selling activity at the lower end of the FTSE 250.”
“Our approach is to identify companies which exhibit strong quality, earnings visibility and price or earnings momentum and in this environment these companies underperformed.”FE Trustnet recently examined the reasons for Nimmo’s underperformance in more detail.
The manager also highlighted the negative impact of stock market flotations on small caps and warned that small cap returns could be muted in the years ahead.
Performance of the trust has improved in recent months.
While a very short time-frame, Nimmo has outperformed both the sector and the benchmark since the beginning of the third quarter, returning 2.04 per cent, compared with the sector’s 0.72 per cent and the benchmark’s 0.49 per cent.
The past year has seen Nimmo make a number of major changes to his portfolio, including the disposal of its former top holding.
The trust exited its position in ASOS, which accounted for 5.7 per cent of the portfolio at the start of 2014, after difficulties in controlling its pace of growth.
Nimmo bought this investment for £400,000 but sold it for more than £13m.
Domino's Pizza (UK & Ireland) was also sold after nine years in the portfolio, with Nimmo citing its expansion into Germany as becoming “problematic”.
The trust’s stake in Hargreaves Lansdown was also reduced after strong performance.
Additions have included a stake in self-storage operator Big Yellow Group being bought back in light of significant capital investment.
Keller was added to get exposure to the international construction recovery while Cranswick was bought because of its consistency.
Nimmo added: “Indeed, the company has been going through somewhat of a process of renewal, as successful larger holdings are being sold on account of their size and the proceeds recycled into the new larger companies of tomorrow.”
Source: FE Analytics
Standard Life UK Smaller Companies has a total expense ratio of 1.17 per cent. It has gearing of 1 per cent.
