One way to learn about how to invest successfully is to follow the style and rules of the experts. Yesterday (27/10/2016) I attended the AGM of Standard Life UK Smaller Companies Trust (SLS) where Harry Nimmo has been the fund manager since 2003. There was much that investors could learn from him.
I was also going to attend the City of London Investment Trust (CTY) later in the day but as they were offering an on-line live video of that decided to use that option instead – that was a mistake as it did not appear. Top marks for promoting that, but a black mark for it not being provided!
Here is a very brief report on the SLS meeting – a much fuller one can be found here. The fund is managed by Harry Nimmo who has a great track record. I would hold more of this company but in fact of his top 30 holdings I hold 12 directly so there is a lot of overlap. It is pure coincidence that there is such an overlap, but another shareholder asked a question about possible “followers” driving up the share prices of the portfolio companies. Mr Nimmo thought that was unlikely.
Mr Nimmo has no plans to retire for some years and has even bought more shares in the Trust recently. He mentioned he had been with Standard Life for 32 years and explained his investment approach as part of his presentation to investors.
Normally they aim to hold about 55 equities which are Harry’s “conviction ideas”. He said they don’t invest in micro caps or blue-sky propositions and keep their largest holdings below 5% of the portfolio (i.e. tend to top slice those that grow too large). They avoid oil/gas and mining companies.
Harry covered the top ten holdings and the slide he used showed their dividends (which all but one pay), and the prospective p/e – generally above 20 with two (Accesso and Fevertree) above 50. A shareholder commented on this but Harry mentioned ASOS – sold at a good profit in 2014 – where it was above 50 all the time they held it. Another shareholder questioned share valuation techniques and whether they use “PEGs”. Harry said there are lots of different ways to value companies, but financial valuation is low down the list in his stock selection criteria. These tend to be: business momentum, growth, cash flow, variability of earnings and clear future path.
Harry also covered the sector breakdown (strong focus on software, healthcare and food/drink at present), and his recent sales and purchases. He also said that the “tracking error” versus their index has gone up (i.e. they are diverging from index holdings). But volatility is only 0.6 versus 1.0 in the benchmark. Also their dividend growth forecast is higher and they have a high return on equity in their portfolio holdings. In summary he said smaller companies can give higher returns over the long term, but there is no higher risk in them [at least in terms of his holdings].
He was also asked to expand on the matrix investment process they use. The answer given was that they track 13 different factors – growth, quality, momentum, etc. He said they are looking for a predictable business. That delivers positive results, but does not necessarily work all the time.
Altogether a well run meeting that was well worth attending and a useful reminder on how to pick good small cap shares.
Roger Lawson
It is interesting to compare and contrast Harry Nimmo’s investment style with mine. He seems to focus strongly on business quality and growth, with little attention to share price. My own style is very much valuation focussed: I look for mispriced situations. These could be either growing businesses, where the market appears to be undervaluing growth (unusual!), with a focus on Jim Slater’s PEG measure, or “value” situations, where a decent company’s share price has been beaten down too far or net assets exceed market cap. (and there is some prospect that shareholders will receive value for those assets). I also operate an asset allocation policy, which diversifies my sector and geographic exposure and seeks to control risk.
So… the proof of the pudding? Thought I’d compare the long-term performance of my main SIPP portfolio with that of Nimmo’s trust. The results were rather interesting!
Over 5 and 10 year periods, the SLS trust has achieved an annualised NAV total return of 11.5% and 12.1% respectively. My SIPP portfolio has achieved annualised 10.0% and 11.4% returns over equivalent periods. HOWEVER within the last 6 years, SLS has experienced drawdowns of -13.8% in 2011; -16.6% in 2014; and -8.3% so far this year. By contrast, my SIPP only had one down year in that period: -7.6% in 2011. I am up 7.9% YTD this year. I have only had one other down year in the entire 14 year history of my SIPP: -26.9% in 2008 – and it appears that SLS had a much bigger drawdown in that year too*.
Conclusion: Harry Nimmo’s style HAS achieved slightly better results – but at the expense of more of a rollercoaster ride. Once again I think this shows that investment styles are very much “horses for courses” and each investor needs to find a strategy that suits their own requirements, skills and personality – and that there is certainly room for improvement in my own performance, though it’s a level of performance I’m pretty comfortable with.
*All figures for SLS according to SharePad.
Mark Bentley
BTW – one thing Harry and I have in common is the topslicing policy: I also don’t have any individual holdings exceeding 5% of my total portfolio.
The index beat you both
Which index? Roger Lawson