Trust in smaller firms paying off handsomely

This has not been the best of times for investors in UK companies – and smaller companies in particular. A sluggish economy, a prolonged squeeze on earnings and spending, continuing Brexit uncertainty and the vulnerability of the minority government at Westminster have combined to make the UK one of least favoured of the developed world’s stock markets.

Global funds have been cutting their exposure as the pound has weakened and questions have crowded in over the central bank’s interest rate and monetary policy. Over the past 12 months the FTSE100 share index has managed a gain of just over 3 per cent. How much more vulnerable the UK’S smaller companies must have fared over this period.

It is against this background that investors with holdings in specialist smaller company funds and trusts have been anxiously watching performance. But last week one of Scotland’s leading companies in this space unveiled a stunning set of results.

Step forward the £375 million Standard Life Smaller Companies Investment Trust (SLSCT) managed by the widely respected sector veteran Harry Nimmo.

It has not always been plain sailing for this trust, and over the most recent period it has struggled to find favour, with the shares standing at a discount of almost eight per cent to the value of underlying assets. Yet it has beaten the average of investment trusts in eight out of ten years.

Latest results unveiled last week only deepen this undervaluation. Over the 12 months to end June shares in SLSCT have risen by 16 per cent, five times the gain of the FTSE100. Over five years they have risen by 93 per cent and over ten years they have risen almost fourfold – a remarkable achievement for a trust covering a volatile and often unloved sector.

It has been widely thought that the Brexit vote did for funds specialising in this area. But here is a remarkable statistic gleaned from the results last week: taking the 2017 and 2018 results together and adding in the dividend payments, both the net asset value total return and the share price total return are both more than 60 per cent higher since the year end immediately following the Brexit referendum.

By any standards, this is a remarkable achievement by Harry Nimmo and his team. Indeed, since he was appointed manager back in 2003, the trust has outperformed its benchmark comparator over the period by almost four per cent a year.

Reflecting the trust’s growing investments in the Alternative Investment Market (AIM) the comparator has now been changed to a more appropriate if tonguetwisting mouthful – the Numis Smaller Companies plus AIM (excluding Investment Companies) Index.

While the backdrop, writes trust chairman Allister Langlands, “is not benign from an investors’ perspective, markets have coped… The portfolio continues to deliver a combination of capital growth supported by healthy dividend growth and we expect this to be the case over the longer term. The emphasis on risk aversion, quality and resilience, growth and momentum remains intact.”

Trust performance has been helped by heavy overweight positions in high quality software, healthcare, food & drink, support services and electronics.

Lower weightings in financials and property stocks were positive, as was the total lack of exposure to oil and gas and mining companies. An underweight position in industrials was negative prior to Christmas and positive thereafter.

Three out of the trust’s five best performers were the same as last year – Fevertree Drinks, NMC Healthcare and First Derivatives – the “run your winners” approach paying off here.

Shareholders will be asked to give their blessing in October to the proposed merger with Dunedin Smaller Companies Trust which should boost assets to more than £500 million and lead, it is claimed, to increased scale, a reduction in the ongoing charges ratio and increased liquidity – though as investors in parent group Standard Life Aberdeen will testify, size alone is no guarantor whatever of higher shareholder returns.

Shares in ‘Staberdeen’ – as one critical wag now describes it – have slumped by a quarter from their pre-merger announcement level – a woeful evaporation of value set against the lofty claims at the time of operational efficiencies and enhanced profile.

However, so far the management of SLSCT has not been disrupted by the merger and been allowed to get on with it.