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
Voices
Ukip leader Nigel Farage arrives at the Rochester by-election count
voicesIs it any wonder that Thornberry, Miliband, and Cameron have no idea about ordinary everyday life?
Sport
sportComment: Win or lose Hamilton represents the best of Britain
Life and Style
tech
Sport
Arsene Wenger reacts during Arsenal's 2-1 defeat to Swansea
footballMan United and Arsenal meet on Saturday with both clubs this time languishing outside the top four
News
i100BBC political editor Nick Robinson had a lot of explaining to do
Life and Style
Nappies could have advice on them to encourage mothers and fathers to talk to their babies more often
newsTalking to babies can improve their language and vocabulary skills
Sport
Tony Bellew holds two inflatable plastic sheep at the weigh-in for his rematch with Nathan Cleverly
boxingGrudge match takes place on Saturday night
Arts and Entertainment
Mark Ronson at PS1
arts + ents
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

    Reach Volunteering: Trustee – PR& Marketing, Social Care, Commercial skills

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...

    Reach Volunteering: Charity Treasurer

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...

    SThree: Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

    Ampersand Consulting LLP: Markit EDM (CADIS) Developer

    £50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

    Day In a Page

    US immigration: President Obama ready to press ahead with long-promised plan to overhaul 'broken system' - but will it get past a Republican-controlled Congress?

    Immigration: Obama's final frontier

    The President is ready to press ahead with the long-promised plan to overhaul America's 'broken system' - but will it get past a Republican-controlled Congress?
    Bill Cosby rape allegations explained: Why are these allegations coming out now? Why didn’t these women come forward earlier? And why has nobody taken legal action?

    Bill Cosby rape allegations explained

    Why are these allegations coming out now? Why has nobody taken legal action? And what happens next for the man once thought of as 'America's Dad'
    Four years of excruciating seizures caused by the 1cm tapeworm found burrowing through a man's brain

    You know that headache you’ve got?

    Four years of excruciating seizures caused by the 1cm tapeworm found burrowing through a man's brain
    Travelling to work by scooter is faster than walking and less sweaty than cycling, so why aren’t we all doing it?

    Scoot commute

    Travelling to work by scooter is faster than walking and less sweaty than cycling, so why aren’t we all doing it?
    Paul Robeson: The story of how an American icon was driven to death to be told in film

    The Paul Robeson story

    How an American icon was driven to death to be told in film
    10 best satellite navigation systems

    Never get lost again: 10 best satellite navigation systems

    Keep your vehicle going in the right direction with a clever device
    Paul Scholes column: England must learn to keep possession and dictate games before they are exposed by the likes of Germany and Brazil

    Paul Scholes column

    England must learn to keep possession and dictate games before they are exposed by the likes of Germany and Brazil
    Michael Dawson: I’ll thank Spurs after we win says defender as he prepares to return with Hull

    Michael Dawson: I’ll thank Spurs after we win

    Hull defender faces his struggling former club on Sunday ready to show what they are missing. But he says he will always be grateful to Tottenham
    Frank Warren column: Dr Wu has big plans for the professionals yet he should stick to the amateur game

    Frank Warren column

    Dr Wu has big plans for the professionals yet he should stick to the amateur game
    Synagogue attack: Fear unites both sides of Jerusalem as minister warns restoring quiet could take 'months'

    Terror unites Jerusalem after synagogue attack

    Rising violence and increased police patrols have left residents of all faiths looking over their shoulders
    Medecins sans Frontieres: The Ebola crisis has them in the headlines, but their work goes far beyond West Africa

    'How do you carry on? You have to...'

    The Ebola crisis has Medecins sans Frontieres in the headlines, but their work goes far beyond West Africa
    Isis extends its deadly reach with suicide bombing in Kurdish capital

    Isis extends its deadly reach with suicide bombing in Kurdish capital

    Residents in what was Iraq’s safest city fear an increase in jihadist attacks, reports Patrick Cockburn
    Underwater photography competition winners 2014 - in pictures

    'Mysterious and inviting' shot of diver wins photography competition

    Stunning image of cenote in Mexico takes top prize
    Sir John Major: Negative West End portrayals of politicians put people off voting

    Sir John Major hits out at theatres

    Negative West End portrayals of politicians put people off voting
    Kicking Barbie's butt: How the growth of 3D printing enabled me to make an army of custom-made figurines

    Kicking Barbie's butt

    How the growth of 3D printing enabled toy-designer to make an army of custom-made figurines