The riskiest and most growth-orientated areas of the UK market have sold off in recent weeks, with Nimmo’s trust the worst-performing in its sector since the Numis benchmark peaked on 6 March and the open-ended fund the second worst in its sector. The open-ended fund has also recently re-opened to new investors, meaning that investors may view this recent slump as a good entry point.
Ben Willis, head of research at Whitechurch Securities, says that the critical thing to remember for investors in this fund is that it is not a small-cap portfolio any longer.
“It’s called a smaller companies fund but that’s in the broadest sense of the word,” he said. “When it started it was a smaller company fund but now it is really a multi cap fund.”
“To be fair he has always said he will back his winners and he has followed some stocks into the FTSE 100.”
One example of such a stock is Hargreaves Lansdown, which Nimmo has held for many years. The company was recently promoted to the FTSE 100, but still makes up 3.4 per cent of the open-ended portfolio.
The fund currently has 59.7 per cent in the mid cap FTSE 250 and a further 27.8 per cent off benchmark, largely in AIM.
This includes stocks such as ASOS, which with a market cap of £3.8bn is large enough to be in the FTSE 100. ASOS makes up 4.9 per cent of the portfolio.
Telecom Plus is the portfolio’s largest position at 5.2 per cent and is listed on the FTSE 250. After ASOS the next largest is Rightmove, also 250, SuperGroup, another FTSE 250 stock, and then Hargreaves Lansdown.
“He has a great track record and proved his skill through several market cycles but if you are looking for a true smaller company fund there are others with a good record out there,” Willis said.
Most of these largest positions are in stocks that are based on utilising new technology, chiefly the internet. These stocks have been hard hit in recent weeks after a period of market-beating growth.
Performance of stocks in 2014
Source: FE Analytics
Tech sectors started to sell off as investors de-risked their portfolios. Having risen faster than the market in the previous year they had further to fall, and the individual stocks that had risen the most were hurt the most.
ASOS suffered for this reason: the stock is down almost 30 per cent year to date after results that were slightly worse than expected and growth forecasts that were lower but still very positive.
Nimmo (pictured above) has held the company since it was tiny and has made more than 10 times his original investment.
Another reason for the portfolio’s dip in form is its style has fallen out of favour. Standard Life’s Matrix screen, which is used to select candidate stocks for its funds, incorporates momentum as one of the chief buy signals.
Data from FE Analytics shows that momentum has been a good strategy to use over a five year period, with 2013 especially strong, but the turn in the market means that value stocks have outperformed.
Relative performance of momentum and value in 2014
Source: FE Analytics
Any market correction is likely to see momentum-focused funds underperform as highly priced stocks tend to correct more in such events.
This is the sort of dynamic that could swiftly reverse and suggest that the Standard Life funds could be at a good entry point, however, the outlook for the tech sector is harder to read.
Willis says that Nimmo has ridden out poor patches for his stocks in the past.
“Obviously those stocks have had a good run,” Willis said. “He is prepared to hold his winners. He will probably say they are great companies and will improve.”
“People like Rightmove have been seen as market leaders in that area, and Hargreaves Lansdown too.”
“It’s like he’s trying to buy the nifty fifty of the future. There will be periods when that might run against him, and after they have experienced significant share price re-ratings there was always going to be a pull-back. But he has done the research and he has picked those names.”
Willis says the largest concern he has with the fund is the situation with its past soft-closure.
The fund was previously soft-closed to new investors due to concerns about its size.
As funds grow in size it becomes harder and harder for managers to take meaningful positions in small cap companies without ending up owning the company. However, in March the fund was re-opened to new investors.
If you are buying the £1.4bn fund knowing that it is focused on the mid-cap area this might be less of a concern.
However, Willis says that for large buyers like Whitechurch the concern is that the fund could be closed again, meaning that they wouldn’t be able to keep investing clients’ money in the funds over a period of time and would have to pull their money out., incurring costs on the way.
For retail investors this could potentially be less of a problem given that the fund was available through platforms even when previously soft-closed, but the risk is that any future closure coukd be more severely enforced.
An added complication to be aware of with the closed-ended fund is the discount movement. The trust had previously been trading on a small premium reflecting its outstanding record over the longer term.
However, as usually happens, when sentiment turned against the trust the discount widened, compounding investors’ losses.
Oriel Securities warned investors last week that it could be too early to buy back into smaller companies trusts given the potential for this dynamic to worsen.
Thanks to the recent sell-off the open-ended fund is no longer the top performing portfolio over 10 years in the sector, although the closed-ended fund is, in a smaller sector.
Performance of trust and fund over 5yrs
Source: FE Analytics
Over three years both portfolios are bottom quartile in their respective sectors and over five years are second quartile.
