Mark Dampier: Small can be beautiful if you're seeking a bargain

The Analyst

I am always surprised by the extent to which smaller companies are overlooked by investors.

Whether it be on a UK or global level, smaller companies don't feature heavily in many portfolios. But I believe it's an area retail investors should focus on more.

Large, institutional investors such as pension funds and insurance companies are generally unable to invest much in smaller companies. Their sheer size means they simply can't buy the amount of stock they need. Similarly, the fortunes of the world's largest companies are well publicised. Analysts pore over every detail of their accounts and the financial press dedicates many column inches to their prospects. This leaves smaller companies under-researched. Many fund managers don't bother wearing out shoe leather visiting, researching, or understanding these businesses, leaving promising bargains available for those willing to look.

While smaller companies are clearly more volatile, investors have been rewarded for taking the extra risk over the long term. Over the past 10 years, global, smaller companies have significantly outperformed their larger counterparts, returning 237 per cent compared with 141 per cent respectively. Their more volatile nature also means they make excellent vehicles for monthly savings into an ISA or SIPP.

One of our favourite fund managers in this area is Harry Nimmo, who has generated superb returns on the SLI UK Smaller Companies fund since its launch in January 1997. The fund has now reached capacity and is no longer seeking new investment.

The SLI Global Smaller Companies Fund was launched in January 2012 to capture the increasing array of opportunities to be found across the world. Mr Nimmo's role entails overseeing the management of the fund, ensuring his well-rehearsed investment process is adhered to. In terms of stock picking his key focus is on the UK portion where 16 per cent of the fund is invested. The portfolio is co-managed by Alan Rowsell who focuses on the fund's overseas holdings. The pair work closely together in finding the highest-quality stocks to add to the portfolio. It is concentrated with around 57 stocks at present which allows each to have a significant impact on performance, but it is higher risk.

Mr Nimmo's emphasis on quality has worked well in the UK. He looks to buy tomorrow's larger companies today. This means he prefers those with a proven business model, ideally generating recurring revenue to help the company prosper through good times and bad. He also likes those able to raise prices without seeing a drop in demand and those operating in areas with barriers to entry, making it harder for the competition to swoop in and take market share.

A large part of Mr Nimmo's success over the long term can be attributed to his willingness to hold onto his winners, participating in their success as they grow. This fund has had a number of successes in the US where around 38 per cent of the portfolio is invested. Examples include Maximus which operates a variety of services for government human and health programmes in the US. The business has seen increasing demand for its services especially as the government seeks to outsource as a way of cutting the budget deficit.

Other holdings include Amtrust, an insurance company whose business has continued to grow, and Polaris, which has seen sales increase as it has introduced exciting new products to its off-road vehicle and motorcycle franchise.

Initial results have been encouraging with the fund rising by 25.6 per cent since launch compared with the average in the sector which has returned 19.4 per cent. Significant contributors to performance also include Cosmos Pharmaceuticals, a Japanese discount pharmaceutical chain, which has been held in the portfolio since launch. The company's discount business model enables it to take market share from the competition and they it has now embarked on an aggressive expansion plan. The stock has grown to be the largest position in the fund in keeping with the managers' investment philosophy of running their winners and cutting their losers.

The fund seems to have had little publicity since launch which is strange given the quality team and Mr Nimmo's long track record.

For those seeking a long-term investment in under-exploited areas of the market where plenty of anomalies and mispricing's still exist, I believe this fund could be a good place to start.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Arts and Entertainment
From Mean Girls to Mamet: Lindsay Lohan
theatre
Sport
Nathaniel Clyne (No 2) drives home his side's second goal past Arsenal’s David Ospina at the Emirates
footballArsenal 1 Southampton 2: Arsène Wenger pays the price for picking reserve side in Capital One Cup
News
Mike Tyson has led an appalling and sad life, but are we not a country that gives second chances?
peopleFormer boxer 'watched over' crash victim until ambulance arrived
Arts and Entertainment
Geena Davis, founder and chair of the Geena Davis Institute on Gender in Media
tv
News
i100
Travel
travelGallery And yes, it is indoors
Arts and Entertainment
The Tiger Who Came To Tea
booksJudith Kerr on what inspired her latest animal intruder - 'The Crocodile Under the Bed'
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
News
Alan Bennett criticised the lack of fairness in British society encapsulated by the private school system
peopleBut he does like Stewart Lee
Sport
John Terry, Frank Lampard
footballChelsea captain sends signed shirt to fan whose mum had died
News
people
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    IT Project manager - Web E-commerce

    £65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...

    Trainee / Experienced Recruitment Consultants

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

    Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

    Trainee Recruitment Consultants - Banking & Finance

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

    Day In a Page

    Syria air strikes: ‘Peace President’ Obama had to take stronger action against Isis after beheadings

    Robert Fisk on Syria air strikes

    ‘Peace President’ Obama had to take stronger action against Isis after beheadings
    Will Lindsay Lohan's West End debut be a turnaround moment for her career?

    Lindsay Lohan's West End debut

    Will this be a turnaround moment for her career?
    'The Crocodile Under the Bed': Judith Kerr's follow-up to 'The Tiger Who Came to Tea'

    The follow-up to 'The Tiger Who Came to Tea'

    Judith Kerr on what inspired her latest animal intruder - 'The Crocodile Under the Bed' - which has taken 46 years to get into print
    BBC Television Centre: A nostalgic wander through the sets, studios and ghosts of programmes past

    BBC Television Centre

    A nostalgic wander through the sets, studios and ghosts of programmes past
    Lonesome George: Custody battle in Galapagos over tortoise remains

    My George!

    Custody battle in Galapagos over tortoise remains
    10 best rucksacks for backpackers

    Pack up your troubles: 10 best rucksacks for backpackers

    Off on an intrepid trip? Experts from student trip specialists Real Gap and Quest Overseas recommend luggage for travellers on the move
    Secret politics of the weekly shop

    The politics of the weekly shop

    New app reveals political leanings of food companies
    Beam me up, Scottie!

    Beam me up, Scottie!

    Celebrity Trekkies from Alex Salmond to Barack Obama
    Beware Wet Paint: The ICA's latest ambitious exhibition

    Beware Wet Paint

    The ICA's latest ambitious exhibition
    Pink Floyd have produced some of rock's greatest ever album covers

    Pink Floyd have produced some of rock's greatest ever album covers

    Can 'The Endless River' carry on the tradition?
    Sanctuary for the suicidal

    Sanctuary for the suicidal

    One mother's story of how London charity Maytree helped her son with his depression
    A roller-coaster tale from the 'voice of a generation'

    Not That Kind of Girl:

    A roller-coaster tale from 'voice of a generation' Lena Dunham
    London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

    London is not bedlam or a cradle of vice

    In fact it, as much as anywhere, deserves independence
    Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

    Vivienne Westwood 'didn’t want' relationship with McLaren

    Designer 'felt pressured' into going out with Sex Pistols manager
    Jourdan Dunn: Model mother

    Model mother

    Jordan Dunn became one of the best-paid models in the world