Merian UK Smaller Companies – domestic bliss?
Jonathon Curtis | Wed 29 January 2020
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- Dan Nickols has invested more in companies that do most of their business in the UK
- He thinks UK smaller companies are set to outpace the rest of the economy
- Recent and long-term performance has been strong
With hundreds of companies, a wide range of industries, and many niche and cutting-edge businesses, the UK smaller companies sector really is a stock-picker’s paradise. It’s also where some of the most successful fund managers can be found.
Dan Nickols, manager of the Merian UK Smaller Companies fund, is one of them. He’s shown he’s a strong stock-picker but, more than many of his peers, he also invests according to his views on the economy. That combination has built an enviable long-term track record. We think Nickols is a talented manager with a well-resourced team around him. Remember investing in smaller companies is higher risk than investing in larger ones. The fund isn’t currently on the Wealth 50.
How’s the fund performed?
The fund rebounded strongly in 2019 following disappointing results the year before. In the 12 months to 31 December 2019 it returned 29.7% compared with the FTSE Small Cap (excluding investment trusts) index’s 17.7%* gain. Remember past performance isn’t a guide to the future and one year is too short a period of time to draw meaningful conclusions.
There was a broad range of strong performers, including online fashion retailer Boohoo, work-wear supplier and launderer Johnson Service Group, and fund manager Liontrust Asset Management. Stocks that didn’t do so well include business-to-business information company Ascential, smart metering provider SMS, and litigation financer Burford, which Nickols had sold most but not all of before its steep share price decline.
Over the long term Nickols’ performance has been excellent. Since he took over the fund in January 2004 he’s delivered an 838.3%* gain compared with the FTSE Small Cap (excluding investment trusts) index’s 192.1% return. That’s not a guide to the future, and you could get back less than you invest.
Merian UK Smaller Companies performance under Dan Nickols
Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2019
| Annual percentage growth | |||||
|---|---|---|---|---|---|
| Dec 14 -
Dec 15 |
Dec 15 -
Dec 16 |
Dec 16 -
Dec 17 |
Dec 17 -
Dec 18 |
Dec 18 -
Dec 19 |
|
| Merian UK Smaller Companies | 21.2% | 11.7% | 38.3% | -17.3% | 29.7% |
| FTSE Small Cap ex Investment Trusts | 13.0% | 12.5% | 15.6% | -13.8% | 17.7% |
Past performance is not a guide to the future. Source: Lipper IM to 31/12/2019
What’s changed in the portfolio?
Nickols increased investments in companies that make most of their money in the UK – so-called ‘domestic’ companies. These had been out-of-favour for several years due to Brexit uncertainty and the threat of a potential Corbyn-led government. Nickols saw that as an opportunity to invest in some attractively-priced shares, which he anticipated would rise. To make these investments he sold some companies that had high-growth expectations, but whose share prices reflected the predicted growth.
Nickols thinks there’s still a fair amount of economic uncertainty though, so he’s avoided the very smallest and riskiest of companies. Many of his new investments have been in more medium-sized businesses. These include construction materials provider Breedon, residential property developer Crest Nicholson, and Jet2 airline-owner Dart Group.
The fund’s investment in ‘unquoted’ companies (those not listed on a stock market) has reduced with the sale of online money transfer service TransferWise, which had significantly risen in value since Nickols invested in it. That leaves three unquoted holdings in the fund, making up around 3% of the portfolio. Unquoted companies add ‘liquidity’ risk to the portfolio (they can be difficult to buy and sell).
Manager’s outlook:
Nickols thinks the recent strong performance by small and mid-sized UK companies was justified. They’ve been deeply unloved by many investors for several years but he thinks many of them are high-quality businesses.
Despite recent share price jumps, Nickols thinks UK smaller companies are still attractively valued. He expects the UK government to start spending more, which could bolster the economy, and thinks UK smaller companies are set to grow even faster.
He also takes heart from the dampening hostilities between the US and China. That’s because of the impact they have on the rest of the world, and nearly half the money made by UK smaller companies comes from overseas.