Harry Nimmo, manager of the Standard Life Investments UK Smaller Companies fund, is one of the best known fund managers in the UK small-cap space thanks to a hugely successful track record over the past decade.
Despite a tough 2014 where the manager’s stock picking resulted in bottom quartile performance for the year, Nimmo (pictured) is currently ranked third out of 51 funds in the IA UK Smaller Companies sector over one year. This uptick means the open-ended fund is fifth out of 36 funds over 10 years.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Aside from running the £1.1bn soft-closed fund, the manager heads up the Standard Life UK Smaller Companies investment trust, which also has a strong track record.
The manager is a big believer in buying and holding onto companies for the very long term, especially in the illiquid and volatile AIM market where he currently has about 30 per cent of his fund.
“I think it is important to differentiate between the blue sky end of the AIM market and the traditional profits, revenue and dividends end of AIM,” Nimmo said.
“We invest in firms that are generally run by their founders with low staff turnover. To make money in smaller companies you need to hold these businesses for extended periods of time, with lots of earnings visibility”.
Here Nimmo reveals three of his favourite AIM stocks that he currently thinks are archetypal ‘buy and holds’.
Fevertree
Upmarket mixer maker Fevertree listed back in November and soared ever since but lost some ground in the weakness of August, for what Nimmo believes are very irrational reasons.
Performance of stock since November 2014
Source: FE Analytics
“We participated in the issue in November and until recently it has done extremely well. This is a good example of a stock that you may want to sell when times are tough but you cannot read too much into it that. It is a very profitable business that is growing nicely and now with international reach,” he said.
“It doesn’t really sell too much into China and is more in UK and USA in the premium mixer cocktail market. It is growing by about 25 to 30 per cent per year, which is pretty unusual for a branded business these days.”
“You do see it quite a lot now in the 'off trade' [supermarkets and shops]. It is very interesting when you see just how much shelf space is given over to Fevertree compared to Schweppes, the incumbent. It is not quite neck and neck but it is not that far off. That is a very strong achievement [from Fevertree].”
Nimmo believes further growth could be huge, as the brand becomes more well-known outside of the supermarkets.
“They still have to make a lot of leeway in the ‘on-trade’ – the pubs and the restaurants. It is comparatively early days and in Europe and America. In the last few weeks they have just introduced a can size into supermarkets.”
“They have also recently announced they are going to be on the British Airways long haul routes and the airport lounges. They now have a whole range of mixer drinks. We think it can really change the goal posts. They can go after a least a third of the entire mixer market and they are now a tiny fraction.”
EMIS Health
Nimmo has held this software company that provides all of the software for a GP's surgery since it listed back in 2010, since which it has gained 242.2 per cent.
Performance of stock since 2010
Source: FE Analytics
Nimmo said: “It does everything from electronic patient records and control of drug dispensaries to electronic bookings for patients' slots, accounting and HR rostering.”
“It has 60 per cent of the UK market. It is got a five-year contract with the NHS to supply this and so there is absolute visibility on pricing and revenue. What is more, it is a high margin business: 20 to 25 per cent.”
“It is also gradually bolting on and expanding into other aspects of the NHS. The government is clearly embarrassed about all the money that is going to larger companies and so it is going to smaller providers with a history of providing software that works into the NHS.”
The manager owns about 9 per cent of this company’s stock.
First Derivatives
Lastly, Nimmo holds another 9 per cent of the total stock for this IT trading specialist.
“This is, bizarrely for a software company, headquartered in Northern Ireland. The basis of the company is a data and software company aimed at the applications involving the regulation of stock markets and exchanges around the world,” he said.
“Their software is big data-ish that spots unusual share price moves toward market manipulations or insider-trading. The growing regulation of markets is evolving theme.”
First Derivatives has gained 40.21 per cent over the past year, thanks in part to a splurge of bid activity that has seen it acquire three firms, and boosting profits by 120 per cent, up to June 2015.
Performance of stock over 1yr
Source: FE Analytics