Nimmo has been running retail money in the smaller companies arena since 1997 when he took charge of his Standard Life UK Smaller Companies fund but he only took over the group’s closed-ended version in September 2003.
According to FE Analytics, his Standard Life UK Smaller Companies Investment Trust has been the best performing portfolio in the IT UK Smaller Companies sector over that time with returns of 578.85 per cent, beating its benchmark – the Numis Smaller Companies ex IT index – by 289.91 percentage points in the process.
Performance of fund versus sector and index since Sept 2003
Source: FE Analytics
The trust, thanks to Nimmo’s focus on growth, has also comfortably outperformed over cumulative five and 10-year periods as it has beaten its benchmark in seven out of the last 11 calendar years.
However, investors may have spotted that Standard Life Smaller Companies is now lagging both the sector and index over one and three years, which was mainly thanks to its very poor performance in 2014, when general selling of smaller companies, a number of big stock specific blow-outs and a widening discount meant shareholders were hit by double-digit losses.
According to data from the AIC, after trading on or at NAV for the past few years, the trust is now on a 9.2 per cent discount.
As a point of comparison, its average discount over one year is 5 per cent and over three years that figure is 3 per cent. The trust has even traded on a 1.5 per cent premium at points over the past 12 months.
Due to that wide discount and Nimmo’s strong long-term track record, Charles Cade – head of investment companies research at Numis Securities – says now is a great time to buy shares in the trust.
“Harry Nimmo has a very long-term track record and has a very clearly defined investment style. When a manager’s style is out of favour and their trust is on a wide discount, it offers opportunities for investors,” Cade said.
While Nimmo’s trust outperformed its benchmark in the strongly rising market of 2013 when investors were hungry for risk assets, the manager’s focus on quality growth names meant it failed to keep up with most of its peers – ranking tenth out of a possible 15 that year.
In 2014, however, thanks to his investment style and a number of big stock disappointments – most notably ASOS, which the manager has now sold but fell a staggering 60 per cent last year – the trust was the second worst performer in the sector with losses of 15.1 per cent.
As a point of comparison, its benchmark lost just 1.85 per cent last year.
Performance of trust versus sector and index in 2014
Source: FE Analytics
While the trust’s widening discount will have had an effect on those losses, his style and holdings were the major reasons for Nimmo’s underperformance as his open-ended fund was bottom quartile in the IA UK Smaller Companies sector last year as well – though its losses were smaller at 9 per cent.
Cade added: “You would have to say that, given where we are in the cycle, now is a good time to buy. He also runs an open-ended version which is now quite large, so if investors hold the fund, we think now is a good time to switch.”
Cade also points out that the trust’s board seeks to limit the discount to NAV if its shares trade at a level significantly below 5 per cent by buying back shares, which he says should offer investors further comfort.
Innes Urquhart, analyst at Winterflood Securities, currently recommends Invesco Perpetual UK Smaller Companies and Strategic Equity Capital within the small-cap sector – but he too thinks that Nimmo’s trust is looking increasingly attractive.
“It’s not one we are recommending at the moment, but the discount has widened. Harry Nimmo has a strong track record and a consistent investment approach which is focused on quality growth. It means the trust can underperform at times, and last year was an example of that.”
“However, because of its style, it is a trust that we think will outperform over the longer term and its discount means it is starting to look quite interesting.”
Peter Walls, whose five crown-rated Unicorn Mastertrust is a fund of investment trusts, isn’t as positive on the trust, however.
Walls has built up a good track record relative to his peers in the IA Flexible Investment sector thanks to his contrarian approach – where he only looks at trusts which are trading on a wide discount to their history or peers – admits that Standard Life UK Smaller Companies hasn’t come onto his radar as a screaming buy.
While he rates Nimmo’s abilities, he says that if he were to turn to UK small-caps, there would be others he would choose first.
“Nimmo has periods like this where he underperforms and I wouldn’t suggest he has done anything different this time around as [the underperformance] has been driven by a wholesale period of risk off in small and mid-caps,” Walls said.
“However, we have seen a general shift in ratings, not just over the last year, but more recently as well. When you look at some of the other names in the sector, you can see there has been some quite significant widening of discounts.”
According to data from the AIC, there are 11 trusts in the small-cap sector which are trading on a wider discount than Standard Life UK Smaller Companies.
Though few of them have delivered outperformance on the scale of Nimmo’s portfolio, the list includes highly-rated trusts such as Duniden Smaller Companies, Aberforth Smaller Companies and Henderson Smaller Companies.
Source: The AIC
Also, while Walls admits UK smaller companies are out of favour, he says investors are taking a big risk if they were to buy small-caps now.
A number of experts, such as Henderson’s Bill McQuaker and Neptune’s Robin Geffen, have been selling down their exposure to the UK due to the uncertain political landscape and while smaller companies have performed poorly relative to FTSE 100 stocks recently, several market commentators have warned they are still quite expensive.
As a result, Walls says investors should look elsewhere for value in the current market, such as trusts within the IT Asia Pacific ex Japan sector.
“We are still seeing net outflows from the IA UK Smaller Companies sector and it’s difficult to say when that will stop soon. With the election on the horizon, probably not. I don’t think we have quite reached the buying opportunity stage yet, but we aren’t far away from it.”
However, if investors are willing to take the plunge with small-caps and want Nimmo’s trust to gain exposure, Standard Life UK Smaller Companies is geared at 3 per cent and has ongoing charges of 1.19 per cent.