Mark Dampier: Small can be beautiful if you're seeking a bargain
Friday 31 May 2013
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
How to get fit in minutes
Couriers carry away savings on long-haul flights: Although there may be restrictions on baggage and length of stay, chaperoning company documents can cut the cost of travel
Dirty tricks in a divorce can cause some nasty surprises
10 tips for taking out a personal loan
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
- 2 The awkward moment Sarah Palin raised $25,000 for Hillary Clinton's election campaign
- 3 Ball pool for adults opens in London
- 4 Amal Clooney gives excellent response to fashion question at European Court of Human Rights
- 5 Baldness could soon be treated using stem cells, scientists hope
9 reasons Greece's experiment with the radical left is doomed to failure
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
iJobs Money & Business
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...
Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village