Nimmo: How to get growth in years of crisis
The FE Alpha Manager explains his investment process, how he has managed to beat his peers in the past and how he intends to do so in the future.
The revolutionary growth in doing business over the internet offers investors the chance to get strong long-term returns even in a time of crisis, according to FE Alpha Manager Harry Nimmo
Nimmo’s Standard Life Investments UK Smaller Companies
fund is top quartile in its sector over ten, five and three years, while his equivalent investment trust
is the single top performer in its IT UK Smaller Companies sector over those timeframes.
He says that the outperformance of smaller companies sectors will continue through the economic crisis and beyond, supported by the restructuring of the economy towards the internet.
“Certain industries have been transformed over the past ten years and there are newcomers that are stealing business from the traditional players,” he said. “The internet has caused a period of mass corporate extinction.”
“I would rather buy into the new winners than the older losers. There are smaller companies that just keep delivering, no matter what the macro environment,” he said.
Nimmo says Paddy Power – his top holding in the fund – is taking money from traditional bookies William Hill, online fashion retailer ASOS – his top holding in the trust – is out-performing Next and French Connection UK, and websites such as Rightmove are powering away from old media dinosaurs such as Trinity Mirror.
“I like companies that are growing, that have predictability and have momentum, and companies that operate through the internet tend to have that,” he explained. “These companies grow more slowly and steadily than the market.”
“When there’s an outbreak of optimism we will underperform, but the rest of the time when markets are becoming more pessimistic our process does pretty well and that’s most of the time.”
“I do think growth is hard to come by and will be for the next few years. The UK economy is in the doldrums on an extended basis. So if you can get involved in quality growth stocks you can do very well – our earnings sailed through the last recession.”
“The last ten years have been particularly good for us and we are not through the process yet – mobile internet has given legs to the story.”
Data from FE Analytics shows that since Nimmo took over the Standard Life UK Smaller Companies Trust in September 2003 it has outperformed the Standard Life UK Smaller Companies fund, although both have produced high returns to investors.
Performance of fund vs trust since September 2003
Source: FE Analytics
The holdings are very similar, with Nimmo saying you need to get 20 to 25 companies down the list before you find any companies that one vehicle holds but the other doesn’t.
In April FE Trustnet research showed small-cap funds had outperformed their large-cap rivals
in a variety of geographies over three, five and ten years.
Further research in July showed the funds also come out on top on a risk/return basis
Nimmo says that this outperformance will continue as the more innovative firms tend to be newer and smaller.
He explains that on his portfolios he looks past macro considerations to focus on the growth potential of the individual stocks.
“From the macro point of view we do not try to identify turning points or to second guess the markets. We just follow a process and take the rough with the smooth,” he said. “The real gains in small caps come from buying and holding for long periods.”
FTSE 100 company Hargreaves Lansdown sits in the top ten holdings of both the open and closed-end vehicles, but Nimmo explains that the company is one he has held since it was much smaller, and which fitted into the theme of businesses utilising the internet.
“Hargreaves Lansdown didn’t become a bad company just because it got into the FTSE 100,” he joked.
Nimmo concedes that he does at times sail close to the 20 per cent limit that a smaller companies fund can hold in larger firms, but he explains that the extra liquidity they provide can be very helpful when he needs to sell stock dues to fund outflows.
He also explains why valuation investing can lead managers astray, particularly in challenging times like these.
"We do not just buy cheap stocks. If stocks are cheap then they are usually cheap for a reason, they are compromised or there’s something wrong with their business model. Be wary of cheap stocks," he finished.