ASI UK Smaller Companies – December 2020 update

Dominic Rowles | Mon 07 December 2020

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• Harry Nimmo is a talented and longstanding manager in the UK smaller companies sector
• He's used the same disciplined investment approach throughout his career
• The fund's delivered good returns, both over the long and short term, although there are no guarantees about the future
• The managers don’t want to attract significant levels of new investment, so the fund isn't on the Wealth Shortlist

How it fits in a portfolio

Smaller companies typically have more room for growth than larger ones, although they are more volatile and higher-risk. We think this fund could work well as part of an adventurous investment portfolio, and could diversify funds focused on global or larger UK companies.

The fund is fairly large in size for a smaller companies fund, and the managers don’t want to attract significant levels of new investment so they can keep it nimble. That's why we're not currently considering it for the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential.

Manager

Harry Nimmo is one of the most experienced and successful smaller companies managers around, having managed funds since 1997 and delivered impressive long-term returns. We admire his investment approach, which has been replicated across many other ASI smaller companies funds with great success.

Nimmo also manages a UK smaller companies-focused investment trust and serves as co-manager on a small number of global portfolios. As they’re all run similarly and share many of the same companies, we think this is a reasonable workload. He also stepped down from his role as ASI's Global Head of Smaller Companies earlier this year, which allows him to spend more time on his fund management responsibilities.

It was recently announced that Abby Glennie will become co-manager of the fund. She joined the firm from Kames Capital in 2013 and initially spent time on the Larger Companies team before joining the Smaller Companies team in 2016. The move should allow for a more orderly transition if Nimmo decides to retire over the coming years.

Process

The managers believe smaller companies have greater long-term growth potential than larger firms, and are relatively under-researched, making them a trove of opportunity.

To help whittle down the universe of UK smaller companies, the manager uses an in-house system called the Matrix. It provides a score on the quality of each business, its growth prospects and the momentum behind its earnings and share price. This reduces the range of companies to a much smaller shortlist, which the managers and their team can then investigate and debate further.

A strong management team, barriers to entry from competition, a sustainable business model and the ability to raise prices without significantly impacting demand are all qualities the managers look for at this stage of the process. They also meet with each company's management team to glean further insights.

The managers consider the smallest 10% of companies listed on the UK stock market to be 'smaller companies'. But many of these businesses technically fall within the FTSE 250, meaning the fund invests more in medium-sized companies than many of its peers in the IA UK Smaller Companies Sector. We don’t see this as a bad thing though. Medium-sized companies are often seen as the UK stock market's ‘sweet-spot’ – they have more growth potential than larger businesses, but are lower risk than smaller ones. This doesn’t make them a sure thing of course.

The fund currently has a lot invested in technology companies. Recent investments in this section of the portfolio include IT services business Computacenter. The managers have also found plenty of opportunities in the financial services sector. Fund management business Liontrust, and investment platform providers AJ Bell and Integrafin were recently added to the portfolio.

In contrast, an investment in online fashion firm Boohoo was sold. The company performed poorly as evidence emerged of poor working practices at a Leicester-based factory in its supply chain. This raised serious concerns about the company's business model and supply-chain oversight.

Investors should note the managers have the flexibility to invest in derivatives which, if used, adds risk.

Culture

The fund was previously part of Standard Life plc, until the business merged with Aberdeen Asset Management in 2017 to create Standard Life Aberdeen plc. The fund now falls under the new group’s investment business, Aberdeen Standard Investments. While mergers have the potential for disruption, we think the Smaller Companies team were relatively unaffected.

There’s a collegiate feel to the smaller companies team at ASI. Members share research and ideas with each other, and work together to debate and challenge investment decisions.

Environmental, Social and Governance (ESG) considerations have always been an important part of the investment process. The managers engage with companies where they feel there are serious ESG issues and use their right to vote at shareholder meetings.

Cost

The fund has an ongoing annual charge of 0.99%, but we’ve secured HL clients an ongoing saving of 0.22%. This means you’ll pay a net ongoing charge of 0.77%. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund's done well over the long term. An investment of £10,000 made 10 years ago would be worth £33,657* today, compared to £28,319 for the average fund in the IA UK Smaller Companies Sector. We put this down to the managers' ability to select outstanding companies, regardless of what sector they're in. Remember all funds will rise and fall in value, so you could get back less than you invest.

The managers' focus on high-quality companies means it tends to hold up a bit better than the broader UK smaller companies market when times are tough. That was the case over the past year too. The fund outperformed the IA UK Smaller Companies Sector by 2.4%, although past performance is no guide to the future.

One of the fund's top performers over the year was software consultancy firm Kainos. The company recently announced a significant increase in profits within its healthcare business which has been helping the NHS with its covid-19 test and trace system. Videogame developer Team 17 also did well. It benefited from increased sales as people turned to gaming to curb lockdown-induced boredom. The company also has a good pipeline of upcoming game releases.

Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2020.

Find out more about ASI UK Smaller Companies including charges

ASI UK Smaller Companies Key Investor Information