Aberdeen Standard Investments fund manager Harry Nimmo cranked up gearing after a bumper 2019 in which he delivered almost 60% to investors.
The £578.6m Standard Life Investments Smaller Companies Trust delivered a net asset return of 17.5% in H2 2019 on top of the 22.9% Nimmo delivered in the first half of the year, according to its interim results for the six-month period ended 31 December 2019.
The discount traded close to 8% for most of the year but closed 2019 with a 1.8% premium bringing total share price returns to 59%. That is significantly higher than the 22.2% delivered by the Numis Smaller Companies plus Aim over the same period.
The performance in both NAV and share price terms is higher than the 37.9% delivered by his open-ended fund, ASI UK Smaller Companies, which has already been highlighted as being the single best performer across 12 Investment Association sectors analysed by the BMO GAM multi-manager team. The open-ended fund has total assets of £1.9bn.
It is the strongest year for the trust since 2010 when share price returns were 70.5%.
The results also highlighted that Nimmo has returned 1,610% since being appointed to the fund in 2003 compared to 353% in the benchmark.
SLI trust cranks gearing on Conservatives election win
SLI Smaller Companies Trust chairman Allister Langlands, who is retiring in March, described the 2019 election as an “economic and political watershed” for the UK and noted the £20m revolving credit facility was drawn in full shortly after the Conservatives’ win due to Nimmo’s “greater degree of confidence in the outlook for smaller companies”.
Total gearing now sits at 3.4% due to £45m of borrowings combined with £23.3m cash.
But Langlands added that the UK is at the start, not the end, of the Brexit process and that “all the companies in which this company invests are going to be affected”. “The path chosen by the UK electorate is unlikely to be easy in the short term,” he said, while reiterating Nimmo’s ability to pick winners and avoid losers.
He welcomed this week’s announcement that Nimmo was stepping back as global head of smaller companies as “it allows him more time to focus on managing the company”. Langlands will be replaced by Liz Airey when he steps down.
Nimmo buys back into Greggs
Media and customer-focussed businesses remain the two themes running through the portfolio, said Nimmo in the update.
He also likes companies with strong corporate cultures that pay bonuses to all staff, such as Games Workshop and Greggs. The Smaller Companies Trust added to Games Workshop and bought back into Greggs over the period with Nimmo liking the latter’s “particularly effective PR” surrounding its vegan sausage roll launch. The bakery chain along with AB Dynamics were the only positions initiated over the period.
He also added to a large holding in high yield debt and mezzanine finance manager Intermediate Capital.
The trust is overweight real estate, at 6.7%, for the first time in many years, he noted.
Trust benefits by avoiding stocks that knocked Nick Train and Crispin Odey
Dart Group, which owns Jet2, was the biggest contributor to performance over the period buoyed by the collapse of Thomas Cook and the fact it did not own the Boeing 737 MAX planes that were grounded in 2019 due to the Lion Air and Ethiopian Airline accidents.
Fevertree was one of the biggest detractors from performance with Nimmo describing it as sub-par in both the UK and US.
He sold Ted Baker, Accesso, Hostelworld and ECO Animal Health over the period.
He noted the portfolio avoided some of the “major disappointments” of the period, which he named as Ferrexpo, Sirius Minerals, AG Barr and Hurricane Energy, which saw an average share price fall of around 48% in the period.
Last year, Nick Train took a hit from Irn-Bru make AG Barr in July when it issued a profit warning, while Crispin Odey and Jupiter are among the fund managers who have been burnt by Sirius.
Boris bounce largely down to sentiment
Although Nimmo said the emphatic Conservative victory in the UK general election led to a “euphoric bounce” in UK midcap markets in the last three weeks of the year, he noted trading statements were largely negative at the company level.
“This was particularly the case for building, construction, auto dealers and retail sectors,” Nimmo said. “Industrials were also generally weak, as were financial services, oil services, personal goods, healthcare and software, particularly data services related companies that were seen as potentially impacted by Brexit concerns.”
Willis Owen head of personal investing Adrian Lowcock described his comments as spot on.
“Sentiment is often forward looking as are stock markets, where as trading updates and company results are a report on past performance which is why they need to be scrutinised along side the outlook statements.”
