The Alpha Manager interview: Harry Nimmo

Harry Nimmo, head of Smaller Companies and manager of the Standard Life Investments UK Smaller Companies fund for over a decade is driven by a particular process with a heavy reliance on a quantitative screening of the investable universe of firms with market cap of £1bn and below.

It is, he says, the process that has enabled his UK Smaller Companies fund to outperform peers overall since it started in January 1997, despite going through occasional periods of underperformance during that period. 

Q: What is your stockpicking approach?

A. I am trying to buy tomorrow’s larger companies today. That means organic growth is important, proven business models, a high quality threshold, recurring revenues and visibility of profits.

We are not heavily involved in traditional value investors’ territory. We’re not recovery specialists and we’re not big in rescue rights issues.

The screening process is a proprietary one using electronic feeds covering earnings revisions momentum, directors dealings, price momentum, z-scores, and Citywatch shareholder listings. We also look at traditional valuation parameters like prospective price/earnings, dividend yields and finally earnings per share growth. This weighted system covers about 600 stocks between £1bn-£30m market cap.

Once we find high matrix scores we like to meet the companies to check the resilience of the business model, and cross check matrix factors to avoid rogue numbers. With any quant system you can get rogue numbers coming in.

Q: How do you manage risk?

A: I do not let the largest holding become more than 5 per cent of assets. I try to avoid the top 10 stocks becoming more than 30 per cent of assets, and keep blue sky stocks below 5 per cent of assets. I try to keep AIM stocks below 25 per cent of assets, and keep sub-£100m market cap stocks below 5 per cent of assets.

I try not to go completely out of the largest four sectors - support services, real estate, IT software, pharmaceuticals - or become more than double weighted.

A list of about 55 holdings is probably more concentrated than the average smaller companies fund. But, that’s the way it’s been run, and generally I’ve had quite a lower than average level of volatility in the fund. I don’t have any tracking error target, it’s generally been about 5-6 per cent.

Q: What smaller companies opportunities do you see in the current state of the economic cycle?

A. We are seeing a bit of an evolution in the type of sectors and stocks thrown up by the matrix. In the past 4-5 months, for the first time in three years real estate has started to feature again, and financials and retailers.

Q: Do you prefer smaller companies to pay a dividend or reinvest all profit?

A: I’m investing in companies where the dividend is pretty low but growing rapidly, so in that respect the bulk of profits are being reinvested. To keep them honest it’s good in some respects to at least pay a token dividend. It keeps these companies focused on what it’s all about.

Q: To what extent is your portfolio exposed to overseas earnings?

A: One of the things I think about is if the company is going to be tomorrow’s larger company it’s got to work outside the UK, so I welcome overseas revenues. About half the revenues of the companies I’m involved with are from outside the UK. That’s significantly higher than the typical UK listed smaller company.

Q: What sort of investor suits the fund?

A: It’s got broad appeal and that’s probably reflected in the type of investor involved; there’s the full gamut of IFA market, private investor, private client stockbroker.