Mark Dampier: Long-term investing never goes out of fashion
Saturday 31 July 2010
Never judge a book by its cover – a phrase heard so often it is easy to ignore, but do so at your peril. It can be applied to almost any aspect of life, including investments. Take the Standard Life UK Smaller Companies Fund. Far from being a generic smaller company fund, it is really the story of an individual: Harry Nimmo, the fund's manager.
It is difficult to pinpoint exactly what makes a good fund manager great, but in Mr Nimmo's case I can certainly put forward some reasons. In fact, we had first-hand experience of his forensic approach prior to the flotation of Hargreaves Lansdown. He was one of the managers we met and we found he is not afraid of asking management challenging questions.
In my view, he is the Neil Woodford of the smaller company world. They run very different funds but approach management with a similar philosophy. Both tend to avoid companies that are highly sensitive to economic conditions, preferring firms with resilient business models and predictable earnings. This might sound rather dull, but it is a sound, long-term investment strategy.
Indeed, Mr Nimmo is a true long-term investor. Unlike some managers, he doesn't set price targets above which he will sell a stock. If a company is doing well he is happy to hold on, riding its success as it grows, only trimming the position if it exceeds 5 per cent of the portfolio to avoid taking excessive risk in a single stock. Holdings can therefore range from small Aim-listed companies right up to medium-sized companies in the FTSE 250.
This necessitates a disciplined approach and another of Mr Nimmo's virtues is sticking to his guns. Rather than chase short-term profits in a strong bull market, led by highly indebted companies (such as the one seen in 2009), he remains steadfast. Only investing in good quality companies means the portfolio is well placed to outperform over the long term, a strategy that has seen the fund excel against its peers.
In terms of his current views, Mr Nimmo does not see the UK economy slipping into a double-dip recession. Rather, he believes we are entering the next phase of recovery, characterised by an extended period of slow economic growth. Far from being concerned or daunted by this prospect, he believes the companies he holds in the portfolio will thrive. Many of his holdings still have the founders at the helm, often with significant stakes in the businesses. Not only are they passionate but they are highly incentivised to do well. A good example is Abcam, a biotechnology firm whose founder still has a 17 per cent stake in the company. Another one is the company I work for, Hargreaves Lansdown, the fund's third-largest holding.
Mr Nimmo also targets companies that are world leaders in their fields and who he believes are best placed to evolve into the successful companies of tomorrow, even in times of weak growth. Engineering and software firms able to provide high-tech solutions are an example; so too companies embracing the internet to cut costs and reach a wider audience. For instance, ASOS, the UK's largest online-only fashion retailer, is currently the biggest holding within the portfolio.
It is a popular misconception that smaller companies are UK-centric and only reliant on their home market to drive growth. Mr Nimmo is keen to dispel this myth, estimating that 50 per cent of his portfolio earnings derive from overseas markets. So do not fall into the trap of pigeon-holing this fund or thinking that because Britain's economy is likely to struggle it cannot perform.
The fund is far more than just a call to buy smaller companies. It is diversified across businesses of varying sizes, operating in many different geographical areas and sectors. With Mr Nimmo as manager this is very much a core holding and investors should buy it for exposure to him rather than to the sector.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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