Harry Nimmo prepares to ride out Brexit ‘mayhem’

SLI trust outperforms despite inheriting Patisserie Valerie in merger

Harry Nimmo has warned mayhem is on the horizon if Brexit or Donald Trump’s trade war go badly as he reports on the last year within the SLI UK Smaller Companies trust.

Despite losing investors 1.1% over the 12-month period to 30 June, the £506m investment trust outperformed the Numis Smaller Companies plus Aim index, which fell 7.2%.

“The two over-arching ‘macro’ issues going forward remain Brexit and the threat of trade wars. Bad outcomes in both cases could cause mayhem far beyond the realm of UK smaller companies,” said Nimmo in his outlook for the investment trust. He expected Boris Johnson to generate market uncertainty until the current deadline for exit on 31 October or potentially beyond.

However, he said his bottom-up approach is suited to riding out difficult macroeconomic conditions.

Merger rakes up £1.8m

The October merger with the Dunedin Smaller Companies Trust meant the trust increased £147.4m, or 38%, in size.

“The merger with Dunedin has been positive for both sets of shareholders in many ways and maintains the relevance of the company when scale and liquidity are increasingly a requirement for many wealth managers and financial advisers,” said Nimmo.

Costs of the merger were borne by Dunedin Smaller Companies shareholders and totalled £1.8m, or 1.1% of the trust’s AUM.

Aberdeen Standard Investments had previously been criticised for not bearing the costs itself, although a spokesperson said Dunedin shareholders voted for the merger and have “benefitted from a significant uplift in share price and narrowing of discount from around 14% to 6%”.

The ongoing charges ratio for SLI trust shareholders fell 14 basis points from 1.04% to 0.90%, which the annual report attributed to the scale added by the merger, plus a reduction in the annual management charge from July 2018.

Dunedin duds

Nine holdings in Dunedin were brought across while eight sold ahead of the merger. There had been 20% commonality between the portfolios.

Burford Capital and Patisserie Valerie were among the nine companies inherited by Nimmo from the Dunedin trust, which was part of Aberdeen Asset Management’s investment trust stable.

Nimmo said they wrote down the Patisserie Valerie holding “almost as soon as the news broke” that the company had been subject to fraudulent accounting practices. It had represented 0.7% of the portfolio.

Burford was also inherited at the time of the Dunedin merger but was sold in October at 1668p before the recent short attack against the litigation finance firm, which happened after the reporting period. The stock is currently trading at 652p.

Bovine genetics business Genus and polymer manufacturer Victrex are the remaining inherited holdings that have been sold since the merger.

AJ Bell and Nucleus added to portfolio

UK financial services businesses featured among the additions to the investment trust’s portfolio with Nimmo participating in both the AJ Bell and Nucleus IPOs.

His weighting in high yield boutique Intermediate Capital Group grew over the period thanks to the Dunedin merger and now represents 2.7% in the portfolio.

Board appointments

Chairman Allister Langlands will stand down from the board in the next six to nine months with the board set to decide on a replacement in “due course”.

There have been two board members added over the last year.

Alexa Hamilton, who had been on the Dunedin board, joined the board of SLI Smaller Companies at the 2018 AGM after the merger.

Last week, Jupiter chairwoman Liz Airey was appointed as a non-executive on the board. Airey is also a member of the corporate governance committee and investments committee of the Institute of Chartered Accountants in England and Wales and chair of trustees of the Rolls-Royce UK Pension Fund.

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