Following a wretched period of underperformance, Standard Life Investment’s (SLI) Harry Nimmo has said he is very happy with his stock picks and “cautiously optimistic”.
Belying his robust long-term track record, in the second quarter of 2014 the £1.2bn SLI UK Smaller Companies fund plummeted by 11 per cent.
As a result of the fund’s performance and volatility in the past three years, it was named and shamed in fund broker Bestinvest’s ‘Spot the Dog’ list.
Looking back over the past quarter, Mr Nimmo said: “It is a very unusual period in markets, for our fund and our fund performance. It has been a very difficult three months”.
Since the fund’s 1997 launch, it has delivered a hefty total return of 738 per cent versus an IMA UK Small Companies sector average of 369 per cent, according to data from FE Analytics.
But in the first half of the year, Mr Nimmo said the market had to contend with a “strong and swift rotation” out of small caps and a sudden influx of new companies.
Noting that he had not seen such a high level of new issuance in a six-month period since the tech bubble, he said: “This does sap the cash from funds in the sector as funds sell to buy new holdings.”
Market movements this year meant that there was now a “mismatch between share prices and earnings”, he added. “In general terms, earnings forecasts are moving up for our stocks but there is a dislocation between share prices and fundamentals.”
One of his holdings, multi-utility vendor Telecom Plus, saw its earnings forecasts revised up by 2 per cent in the second quarter but its stock collapsed by 26 per cent. Similarly, clothing firm Ted Baker enjoyed a 4 per cent rise in earnings but its shares fell by 16 per cent.
Looking ahead, Mr Nimmo is confident that “unusual factors at play” are coming to an end and that in the UK and globally, earnings releases are starting to drive performance again.
The manager has ditched a number of stocks recently, such as online retailer ASOS and media group Blinkx, both of which saw their share prices collapse after profit warnings. His new holdings include specialist real estate firm Grainger, challenger bank Secure Trust Bank and IT recruitment specialist FDM Group.
In spite of the recent turmoil, he has no intention of altering his investment process. “I am very pleased with the shape of the portfolio. A good number of the firms are growing their dividends quite quickly, with a number paying special dividends,” he said.
