When the going gets tough, the tough stay invested in small firms

At the end the UK business benefits the smaller companies

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The Independent Online

Old Mutual is home to one of the most successful UK equity teams. For more than a decade,  it has been a key contender in the small and medium-sized companies arena. With the appointment of Simon Murphy in 2008, and more recently Richard Buxton, it now also has considerable strength in larger companies.

Hargreaves Lansdown’s research team identified the potential in the UK team many years ago: our multi-manager team first invested with Old Mutual’s UK Smaller Companies fund in 2001. Since then, investors have been richly rewarded.

Investing over this period has required patience – an essential, yet challenging discipline to master. Given the magnitude of the financial crisis in 2008, the easiest and most comfortable option was to sell everything.

However, unless investments were sold at the top of the market prior to the crash, and repurchased at the bottom (which even experts find near impossible), this would have been a costly mistake. The fund suffered a fall of  45 per cent, but investors who held on have been well compensated: it has grown 271.6 per cent from its low in October 2008.

Stock market volatility during the crisis led the fund’s manager, Dan Nickols, to increase exposure to larger players within the smaller company sector; they can generally be traded more easily,  providing greater flexibility in uncertain times.

More recently, he has been diversifying back into the lower end of the market as he feels smaller companies are now more attractively valued relative to medium and large companies. I view this positively as, historically, this is where his stock picking has been at its finest. 

Mr Nickols invests with three broad themes: structural growth; special situations; and economic sensitivity. The former includes a supplier of mixer drinks, Fever Tree. The company has gained significant market share from others in the industry and has established itself as the only premium mixer provider. The stock has risen 85 per cent since it listed in November 2014, aided by a growing number of premium gin brands in the UK, and the rising popularity of the Moscow mule cocktail in the US.

“Special situations” include the veterinary service provider CVS, which is consolidating a fragmented sector through the acquisition of smaller veterinary practices. This approach to growing a business has worked successfully for similar businesses in the past. For example, the funeral services provider Dignity, previously held in the fund, grew considerably through the acquisition of small, family-run funeral parlours.

Finally, Mr Nickols invests in more economically sensitive businesses. The collapse in the oil price has contributed to falling inflation, which, coupled with rising wages, means the average UK household has benefited from a 9 per cent increase in disposable income over the past year. The manager expects consumer services companies to profit, and investments in this area include the housebuilder Crest Nicholson and car retailer Lookers.

The total number of new companies listing on the UK market has grown from 81 in 2013 to 106 over the past year. Mr Nickols feels he is able to add considerable value through stock selection in this area, and so is encouraged by the increasing number of opportunities.

His involvement in floats has historically been positive for the fund. He has invested in 27 smaller company listings since 2013 and, on average, his selections have outperformed the Numis Smaller Companies index by 20.6 per cent over this time.

Smaller companies suffered a hangover in 2014, following stellar performance in 2012 and 2013, but have done well so far this year.

There are always risks posed by the wider economic environment. However, with a more stable political scene, I feel smaller companies in Britain could enjoy something of a revival. With one of the best UK teams at its helm, the Old Mutual UK Smaller Companies fund remains one of my favoured options to harness this potential.