In promoting Standard Life UK Smaller Companies trust to a Gold rating, the analysts praised Nimmo’s ability to weather different stages of the market cycle – something which small caps have traditionally been very sensitive too.
Great when markets are on the way up, less so on the way down. That’s the common held belief, though over longer-term time horizons – spanning market peaks and troughs – the funds have largely delivered positive returns.
The numbers game
The average for funds in the open-ended IMA UK Smaller Companies sector is up 15% over five years to 1 October according to FE Analytics, covering the period of financial meltdown in 2008. By comparison, the average fund in the UK All Companies sector climbed 6%.
Interestingly, the FTSE Small Cap Index (ex IT) has struggled, down 11% over five years, its discrete performance characterised by huge slumps in late 2008/early 2009, and during the second half of 2011. Alternatively, the Numis NSCI Ex Investment Companies index (previously Hoare Govett), often used as a benchmark by funds in this sector, climbed 29%.
2012 may be considered a year of largely sideways movement in UK equities, though the FTSE index has actually flourished (up 26% year to date), as has Numis NSCI (up 23%), while smaller companies funds are up 17% on average. The average UK All Companies fund climbed 11%.
In terms of Nimmo’s performance, Stephen Peters, investment analyst at Charles Stanley, still recommends his trust as the best performer over three and five years, though acknowledges that this year has proved tougher for the manager.
Quality control
“This year, we have seen quality suffer in favour of valuation,” he says.
“Managers that are prepared to buy value, distressed, less good quality names, such as Aberforth in the closed-ended world, or Fidelity in the open-ended world, are leading the way.”
“Those that have done less well are the likes of Standard Life, BlackRock or Montanaro who will generally pay up more for quality.”
Given that most UK investors will have a large proportion of their assets in large cap names, Peters says it is always sensible to use small cap funds for diversification.
“Long-term returns suggest that buying smaller companies with a value bias is a good way of generating returns,” he adds.
“However, you have to understand exactly what you are buying, whether that is growth or value; the manager’s style; and be prepared for volatility because it is something that comes hand in hand with this sector.”
