Now is an attractive time to buy into FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies trust, according to Numis’ half-year review released earlier this week.
The one FE Crown-rated trust has fallen out of favour among investors due to its bottom-decile performance in 2014, when it lost 15.10 per cent and significantly underperformed its benchmark and sector average.
Performance of fund vs sector and benchmark in 2014
Source: FE Analytics
In an article published in the second half of last year, Nimmo (pictured) told FE Trustnet that the poor performance of his mirror open-ended fund in 2014 was due to a “major market reaction”, which resulted in an aggressive sell-off of small-cap stocks after Federal Reserve chair Janet Yellen hinted that interest rates could rise sooner than expected. 
What’s more, he added that movements from hedge funds and multi-asset funds into lower risk areas meant that many people sold ETFs or derivatives, as managers tend to gain access to high-risk investments through these vehicles.
“Selling activity [in ETFs or derivatives] can drive down the whole FTSE 250 index, in particular the stocks at the bottom end of that index,” he explained.
“In our top 10 holdings, the bulk of our stocks are FTSE 250 companies. We saw these stocks affected quite dramatically over this period.”
However, while his open-ended fund has moved to top-decile in 2015, his smaller companies trust has remained bottom-decile year-to-date, thanks largely to its widening discount.
Does this mean that the £214m trust will continue to struggle? The Numis research team believes that this recent period of underperformance can be overcome over the long-term, and has in fact made the unloved trust more attractive.
“We would highlight Standard Life UK Smaller Companies managed by Harry Nimmo, which has a differentiated approach from most of its peers by its focus on growth stocks. The fund’s long term track record is impressive, but NAV returns of 61 per cent over the past three years have lagged behind both the Numis Smaller Cos ex ITs Index of 71 per cent and the peer group return of 85 per cent,” the report stated.
“Reflecting this, the fund has lost its premium rating and now trades at a 9 per cent discount. We believe it is positive that the manager is sticking to his investment process, and the fund has recovered strongly after previous periods of underperformance, such as in 2008.”
Numis believe that now could be an attractive entry point to gain access to an experienced manager with a good long-term track record, which could mean that discounts will begin to narrow if performance recovers.
“In addition, the discount is also underpinned by a commitment to hold a six-monthly tender for up to 5 per cent of the share capital at NAV less costs and a 2 per cent exit charge (the fund held a tender in June for the first time since 2010),” the Numis team added.
Over the long-term, the Standard Life UK Smaller Companies trust has achieved a stellar performance, providing a total return of 400.85 per cent and outperforming both its benchmark and sector by more than double.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
What’s more, it has achieved a top-decile alpha ratio relative to its benchmark, a top-decile annualised volatility and a top-decile Sharpe ratio, which measures risk-adjusted returns, over the same time period.
Winterflood’s Kieran Drake also believes that now is a good opportunity to buy into the trust which, over the last few days, has seen its discount widen further to 10.1 per cent.
“I think we’d agree with [Numis’] sentiment. He has performed very strongly in the past and, although performance hasn’t been at that level in recent times, the fund has a growth bias which has been a little bit out-of-favour with markets rotating into value,” he said.
“You can see that with smaller companies’ performances, return has a value bias. I think the fund did trade on a premium for quite a long period and I think it does offer value certainly, and we would expect the fund to outperform over the longer term.”
“I think its [investment] process has worked quite well in the past and I think we would expect that to be true in the future as well.”
The trust, which is geared at 4 per cent, comprises of 60 holdings that represent Nimmo’s highest-conviction investment ideas.
Currently, it has a 54.4 per cent weighting in the Numis Smaller Companies index, a 28.7 per cent weighting in AIM stocks and has 14.4 per cent in the FTSE 250. The remaining 2.5 per cent of stocks are unlisted.
Standard Life UK Smaller Companies has ongoing charges of 1.19 per cent and yields 1.5 per cent.
However, for those investors who remain deterred by Nimmo’s recent underperformance, Drake recommends taking a look at Henderson Smaller Companies investment trust, which has been managed by Neil Hermon since 2000.
Over 10 years, the £616m trust has achieved a total return of 320.45 per cent, outperforming its peer average in the IT UK Smaller Companies sector by 123.61 percentage points and its benchmark by 124.25 percentage points.
Performance of trust vs benchmark and sector over 10yrs
Source: FE Analytics
What’s more, it is trading at a similar discount to Standard Life UK Smaller Companies at 9 per cent, and has been top-quartile for its total returns over one, three and five years.
“The trading on [Henderson Smaller Companies] has been the reverse [of Standard Life UK Smaller Companies] – it did trade on a much wider discount that has since been re-rated upwards,” Drake explained.
“Neil Hermon has a bit more of a focus on mid-cap stocks so it is mid and small-cap, but it has a bit of a bias towards mid-cap. He’s had a very consistent performance and he’s done very well.”
The trust has an OCF of 0.46 per cent, is geared at 8 per cent and yields 1.7 per cent.
Another trust that Drake would recommend is JPMorgan Smaller Companies, which has provided a total return of 323.02 per cent over 10 years, more than doubling the gains of its FTSE Small Cap benchmark in the process.
“It’s on a bit of a wider discount at around 14 per cent, so there is some value there,” he said.
“The interesting thing about this one is that it is genuinely a small-cap fund - a lot of the funds in the small-cap sector are able to take quite large weightings in the mid-cap, but this one, because it has a sister fund which is JP Morgan Mid-Cap, really does focus on the small-cap to differentiate the two, and its performance has been pretty good as well.”
JPMorgan Smaller Companies is geared at 11 per cent, yields 1.1 per cent and has an OCF of 1.13 per cent.
