An exceptional run for the Old Mutual UK Smaller Companies Fund

Heather Ferguson | Mon 20 November 2017

The links in this article will take you to Hargreaves Lansdown’s main website for more information. Please be aware that if you wish to join any of the benefits in your company Plan you must return to this website to apply.

• Manager confident he can find smaller companies with good earnings growth potential, despite a weaker UK economy
• Fund’s positioning changed very little over the past year as manager generally comfortable with the investments he holds
• Manager’s good stock selection remains a key driver of positive returns

Our view

Dan Nickols adopts a flexible approach to changing market conditions when investing in the rich and diverse opportunities offered by this segment of the market. The fund’s performance has been exceptional in recent years, and valuations of many of the fund’s investments are consequently relatively high.

The manager has a good track record of selecting companies that have delivered greater earnings growth than other investors expected, which can justify a higher valuation. However, a higher valuation leaves a company at a greater risk of a sharp share price fall if earnings disappoint. We are confident in Dan Nickols ability to find the success stories of tomorrow and we believe the Old Mutual UK Smaller Companies Fund merits its place on the Wealth 150 list of our favourite funds across the major sectors.

Manager’s outlook

The manager expects continued sterling weakness, a low level of personal savings and high levels of unsecured lending to place pressure on the amount UK consumers have to spend on goods and services. This, coupled with ongoing uncertainty surrounding the terms of the UK’s exit from the European Union, will cause the UK economy to grow at a slower than usual rate, in the manager’s view. Despite this, the manager feels there is a wide array of higher-risk UK smaller companies with good growth opportunities, in both their home market and overseas. He therefore remains confident he can assemble a portfolio of smaller companies able to deliver strong earnings growth.

Fund positioning

The fund’s positioning has changed very little over the past year as the manager has generally been comfortable with the investments he holds. He remains positive on sectors such as software and support services, where he sees strong growth potential, and the fund continues to have greater exposure than the index to these areas. In light of his concerns over disposable incomes, the fund continues to have lower exposure to UK consumer-focussed companies.

However, while Dan Nikols expects slower growth in the UK, he is positive in his outlook for the global economy. He has therefore marginally increased exposure to industrial companies, which generally have a high level of overseas business, to benefit from stronger global growth. New investments in this area include Vesuvius and XP Power.

Performance

Performance over the past year has been strong, and our analysis suggests the manager’s strong stock selection has added considerable value over this period. Investments in Fever-Tree Drinks, Purplebricks, boohoo.com, Burford Capital and Blue Prism all contributed positively to returns. Over the longer term, the fund remains one of the strongest performing funds in the sector. During the manager’s tenure, which began in January 2004, the fund has risen 747.8% compared with 404.1%* for the Numis Smaller Companies (-Inv Trust) Index. However, there are no guarantees this will be repeated in the future. Our analysis attributes this long term strong outperformance to the manager’s ability to consistently select companies that perform better than their peers. The fund has also historically tended to outperform the index in both rising and falling markets, although it will not always do this moving forwards.

Performance of the Old Mutual UK Smaller Companies Fund over manager's tenure

Past performance is not a guide to future performance. Source: Lipper IM * to 31/10/17

Past performance is not a guide to future returns Source: *Lipper IM to 31/10/17

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.