Standard Life UK Smaller Companies
Standard Life UK Smaller Companies is very good at its chosen vocation.
The starting point for Nimmo is a quantitative screening tool which evaluates stocks on ten factors relating to share price performance and attempts to identify improving or deteriorating situations which arguably are unrecognised by the market. It screens the fund’s investible universe of FTSE 350 and FTSE Small-Cap stocks to those worthy of further qualitative analysis. For this portfolio, Nimmo assesses the market share, barriers to entry and pricing power of these companies and favours companies with proven business models and recurring revenues.
Nimmo’s process yields a portfolio that is highly skewed towards dividend-paying growth stocks such as Connaught or Dignity, and he will move up the cap ladder a bit more than some of his rivals (the fund's mid-cap stake was double the category average at the end of June 2008). He aims to hold these stocks until they have achieved their full growth potential and his patience is reflected in the portfolio’s low turnover rate. However, the tilt to growth increases price risk in the portfolio. Stocks with high earnings multiples reflect optimistic expectations and if such expectations are not met this can weigh heavily on their performance. Thus, in the short term the fund can experience spells of higher volatility than its average peer in the Morningstar UK Small-Cap Equity category. Overall, though, Nimmo has managed to keep a lid on volatility which lessens our concern.
This fund has generally exhibited greater resilience than the market during downturns than other UK small-cap funds. In 2007, for example, it ended the year in its category’s top quartile, losing just 2.4% compared with 7% by its average peer. Over the long term, Nimmo has produced strong returns. Between its launch June 1997 and October 2008, the fund posted gains of 9.8% per annum, on an annualised basis, representing an outperformance of 4.8 percentage points over its average category rival.
We have seen Nimmo in action over a number of market cycles and are also encouraged by his personal investment in the fund, which demonstrates conviction in his strategy and aligns his interests’ with those of shareholders’. Granted, many risks are inherent to investing in this segment of the market, but for those seeking exposure to UK smaller companies, we believe this fund is a compelling choice.
