Investors should consider UK smaller-cap stocks with domestic-facing businesses a safer way to take equity exposure following the recent weakness of the broader UK market, according to Harry Nimmo, manager of the Standard Life Investments UK Smaller Companies fund.
Nimmo, who aside from running the £1.1bn soft-closed fund also heads the Standard Life UK Smaller Companies investment trust, clearly does not take a completely unbiased view on the outlook for small-caps.
However, the manager has done much better than most UK equity funds during the worst of the plunge in UK stock markets this year, sitting in the top decile of the IA UK Smaller Companies sector with a return of 5.39 per cent as well as beating every fund in the IA UK Equity Income and IA UK All Companies sectors.
Performance of fund, sector and index since 27 April
Source: FE Analytics
Nimmo (pictured) is one of the best known names in the UK small-cap space and he, Marlborough’s Giles Hargreave and Old Mutual’s Dan Nickols are the only small-cap managers to hold FE Alpha Manager status in each year since the ratings were introduced in 2009.
The momentum-based bottom-up stock selection process Nimmo uses draws on Standard Life Investments’ own ‘matrix’ research tool, which Nimmo himself helped to develop, and has helped both the fund and trust avoid the worst of the falls during the correction.
“Our matrix has been steering away from oil and gas stocks. Our exposure is pretty minimal, there are a couple of stocks that you could argue are a sort of second derivative on the oil and gas price. Mining likewise. That has been very helpful,” he said.
“Our matrix has been steering us towards domestic, UK consumer names which are very far removed from what is going on in other parts of the world. Our exposure has always been to growth themes and less in the way of 'cyclicality'.”
The manager says that despite the torrid time for stocks around the world, the UK businesses that are mainly focused on the domestic economy are in rude health.
“In fact in the two-week period at the start of August we saw about a dozen of our companies, some our largest holdings, come in with results ahead of expectations – more than I have seen in such a concentrated period as long as I can remember.”
“About 70 per cent of the revenues from our companies come from the UK, which is generally a higher number than it has been in the past. We previously had a strong theme of export-orientated engineers and electronics with exposure to emerging markets.”
“However we are not totally immune to the turmoil. There is a tendency for profits to be taken where investors can and if stocks have done very, which they have. A number of our largest stocks are in the FTSE 250, which is 'option-able' and there is a derivative on that so sometimes you get a follow through into some of these stocks.”
According to FE Analytics, Nimmo’s Standard Life UK Smaller Companies Investment Trust has been the best performing portfolio in the IT UK Smaller Companies sector he took over with returns of 667.62 per cent, beating the closest rival by more than 110 percentage points and its benchmark – the Numis Smaller Companies ex IT index – by more than 360 percentage points.
Performance of fund versus sector and index since Sept 2003
Source: FE Analytics
However, both the Standard Life UK Smaller Companies IT and his open-ended fund were hit very hard during the second quarter of 2014 and through the rest of the year, falling much harder than their peer groups.
This was due to the market’s reaction to Fed chair Janet Yellen’s hint that the central bank could lift interest rates sooner than expected, prompting panic selling and shorting by hedge funds and multi-asset funds caps, Nimmo said last year.
His fund lost 8.54 per cent in 2014 while the benchmark fell just 1.85 per cent and the average fund IA UK Smaller Companies sector fell 1.65 per cent.
Performance of fund versus sector and index in 2014
Source: FE Analytics
“We have gained back all the relative performance we lost in 2014. We think it is behind us,” he added.
The fund has a clean ongoing charges figure (OCF0 of 1.69 per cent. The trust has an OCF of 1.19 per cent, is currently on a 7.1 per cent discount and is 6 per cent geared.
