Standard Life UK Smaller Companies Fund research update

Heather Ferguson | Thu 18 June 2015

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Harry Nimmo is one of the UK's longest-standing smaller company fund managers. In his view, a rise in interest rates would signal an improvement to the UK economy, which is positive for smaller companies.

The manager's forensic approach is designed to identify companies with a competitive advantage, capable of sustainable growth. He favours those with robust business models where he feels there is potential for long-term earnings growth. In light of the pressure rising interest rates can have on businesses, the companies in which Harry Nimmo has chosen to invest have, on average, zero debt. In comparison, the average small and medium-sized company has 40% debt.

The manager particularly favours companies with strong earnings potential as it is often an important driver of share price returns. Indeed, small and medium-sized companies generally have higher earnings growth than their larger counterparts and since the turn of the millennium, their returns have comfortably exceeded those of larger companies. With dividends reinvested, the average smaller companies fund has grown 173.9%* since January 2000 compared with 76.9% for the FTSE 100. This past performance should not be seen as a guide to future returns and investors should also note smaller companies are higher-risk and tend to be more volatile than their larger counterparts.

An area of strong earnings potential is the healthcare sector, in the manager's view. UK-listed NMC Health, a hospital management company based in Abu Dhabi, is a large position within the fund. Dubai, where half their clinics are located, has introduced legislation requiring all companies to provide health insurance for employees. The manager expects this to prompt a surge of interest in healthcare companies and feels NMC Health is well-placed to benefit. The manager is also positive on healthcare companies which focus on animal health such as Dechra Pharmaceutical and CVS Group.

Ted Baker, the fund's largest holding, has performed well over the past year. A UK-based clothing retailer, it has been growing internationally and around 1/3 of sales now take place overseas. The manager is confident in the firm's ability to continue growing earnings in this manner. The fund operates a concentrated portfolio which enables each holding to make a significant impact on returns but is a higher-risk strategy.

Our view on this fund

Historically, due to its focus on quality, robust businesses, with strong balance sheets and low debt, the fund has outperformed the peer group during periods when smaller companies have experienced a tougher time. It has lagged when share prices have risen strongly, as this is a time when the higher-risk companies Harry Nimmo avoids tend to perform well.

Harry Nimmo's process has proven highly successful and he has built an exceptional track record managing this fund since its launch in 1997. Over this time, the fund has risen 864.4% compared with 405.2%* for the average fund in the sector, although past performance is not a guide to future returns. We are confident in the manager's ability to outperform the sector over the long term and the fund retains its place on the Wealth 150+ list of our favourite funds across the major sectors.

Performance of the Standard Life UK Smaller Companies Fund since launch

Please remember past performance is not a guide to the future. Source: Lipper IM* to 01/06/15

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.