The Analyst: Smaller companies, bigger returns

This week, I shall revisit a fund I featured in November last year – Standard Life UK Smaller Companies. Back then, I said that it could make an excellent core holding for the smaller-companies proportion of a UK portfolio – and this is still very much my view.

I also said that the fund tends to hold up better than many of its peers when the market is struggling. Thankfully, this has been proved correct; since November the fund has lost about 5 per cent, but its sector average is down by more than 10 per cent. What is more, the fund is actually up slightly so far this year, when most of its peers have lost money.

So, in a time when we have had extreme pessimism, and when you would expect a UK smaller-companies fund to suffer severely, this fund has been very impressive.

Many investors have been selling their smaller-company exposure and moving into larger companies in recent months. I can hardly fault that decision as it seems an entirely logical one. However, where some investors may be going wrong is in moving out of the sector lock, stock and barrel. This is not what most professionals do, because they know there are always some opportunities to be found in smaller companies. If you can identify the top managers, then it is worth sticking with them. In my opinion, Harry Nimmo at Standard Life is one of the very best.

It often surprises me that few investors have much exposure to UK smaller companies. It is the area in the stock market where the most pricing anomalies and under-researched companies can be found. This offers superb opportunities for talented investors to outperform. For example, if you look at the FTSE 100, just 10 companies account for more than half the index. Their accounts are pored over by hundreds, if not thousands, of analysts around the world, which tends to make this quite an efficient market and one where it is hard to make excess returns.

Mr Nimmo's maxim is that he is buying tomorrow's larger companies today. He is looking for proven business models with reliable revenue streams. He does not look for esoteric companies that are marketing some fancy new technology, simply because most of those end up going bust.

Harry Nimmo often refers to his fund as an "each way bet", by which he means that the fund doesn't tend to lose out by too much if larger companies make most of the running. This is borne out by the fact that, even though the FTSE All Share has performed better than the FTSE Small Cap Index this year, Mr Nimmo's fund has actually done better than an average broadly based UK fund. This reinforces my belief that making moves just for asset allocation purposes can often turn out to be wrong.

There is a vast number of smaller companies out there, so it can be a tough universe to keep track of, but Standard Life has a great starting-point. It has developed a system it calls "the matrix", which allows it to rank hundreds of companies against many different criteria, and helps to sieve out some of the dross. In this way, it can focus its in-depth research on the more promising companies.

Mr Nimmo is supported by an experienced team of three other fund managers, each specialising in specific areas so that together they have a high level of expertise across the market.

Smaller companies are very different compared to when I started in the investment industry in the early 1980s. In those days, they tended to be highly cyclical and domestically orientated industrial companies. In effect, this meant that they went through especially exaggerated periods of boom and bust.

There are still plenty of domestic UK companies around, but more of them have strong revenues and sound business models. For example, in Mr Nimmo's portfolio you will find Dignity, the funeral-home operator. However, these days far more small UK companies derive a lot of their earnings from overseas. These include firms such as Chloride Chemring Group, First Quantum Minerals and Salamander Energy.

The three largest holdings in the portfolio are Asos, which is very successful in online clothing; Paddy Power, the sports bookmaker; and Aveva, which designs engineering software. There's plenty of diversification amongst that lot.

So, in conclusion, if you want a well-managed UK smaller companies fund where you won't lose your shirt, and where over time you should make good money, take a look at the Standard Life UK Smaller Companies Fund.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit

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

Arts and Entertainment
Banksy's 'The Girl with the Pierced Eardrum' in Bristol
art'Girl with the Pierced Eardrum' followed hoax reports artist had been arrested and unveiled
Life and Style

Board creates magnetic field to achieve lift

peopleJust weeks after he created dress for Alamuddin-Clooney wedding
Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010

George Lucas criticises the major Hollywood film studios

football West Brom vs Man Utd match report: Blind grabs point, but away form a problem for Van Gaal
Arts and Entertainment
Bloom Time: Mira Sorvino
tvMira Sorvino on leaving movie roles for 'The Intruders'
Arts and Entertainment
Gotham is coming to UK shores this autumn
tvGotham, episode 2, review
Adel Taraabt in action for QPR against West Ham earlier this month
footballQPR boss says midfielder is 'not fit to play football'
First woman: Valentina Tereshkova
peopleNASA guinea pig Kate Greene thinks it might fly
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'

Does Chris Grayling realise what a vague concept he is dealing with?

Life and Style
The charity Sands reports that 11 babies are stillborn everyday in the UK
lifeEleven babies are stillborn every day in the UK, yet no one speaks about this silent tragedy
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)

Parties threaten resort's image as a family destination

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Corporate Actions Administrator / Operations Administrator

    £25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

    Customer Service Executive / Inbound Customer Service Agent

    £18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

    ASP.NET Web Developer / .NET Developer

    £60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

    Operational Risk Manager - Asset Management

    £60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

    Day In a Page

    Two super-sized ships have cruised into British waters, but how big can these behemoths get?

    Super-sized ships: How big can they get?

    Two of the largest vessels in the world cruised into UK waters last week
    British doctors on brink of 'cure' for paralysis with spinal cord treatment

    British doctors on brink of cure for paralysis

    Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
    Let's talk about loss

    We need to talk about loss

    Secrecy and silence surround stillbirth
    Will there be an all-female mission to Mars?

    Will there be an all-female mission to Mars?

    Women may be better suited to space travel than men are
    Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

    'They poured water on, then electrified me...'

    If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
    James Wharton: The former Guard now fighting discrimination against gay soldiers

    The former Guard now fighting discrimination against gay soldiers

    Life after the Army has brought new battles for the LGBT activist James Wharton
    Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

    Panic over Ebola threatens to infect the midterms

    Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
    Premier League coaches join the RSC to swap the tricks of their trades

    Darling, you were fabulous! But offside...

    Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
    How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

    How to dress with authority

    Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
    New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

    New book on Ian Curtis sheds fresh light on the life of the late singer

    'Joy Division were making art... Ian was for real' says author Jon Savage
    Sean Harris: A rare interview with British acting's secret weapon

    Sean Harris: A rare interview with British acting's secret weapon

    The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
    Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

    Tim Minchin interview

    For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
    Boris Johnson's boozing won't win the puritan vote

    Boris's boozing won't win the puritan vote

    Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
    Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

    Tim Wheeler: Alzheimer's, memories and my dad

    Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album