Standard Life UK Smaller Companies
Standard Life UK Smaller Companies Summary Standard Life UK Smaller Companies is a growthorientated portfolio of FTSE 250, FTSE Small Cap and FTSE AIM-listed stocks that is run by one of the most experienced managers in the sector. Harry Nimmo (pictured) took charge of the portfolio in September 2003 after the board switched management responsibilities from Edinburgh Fund Managers to Standard Life Investments, and he immediately sought to bring it in line with his popular openended UK Smaller Companies fund. He continues to run the two offerings using the same process, which is a three-stage bottomup, stockpicking approach and a clear focus on high-quality companies that offer above average growth. As Harry puts it, he is looking to own ‘tomorrow’s largest companies today’. This focus on quality and growth has added significant value over the longer term, with the trust having delivered an NAV total return of 670% since Harry took over the portfolio to the end of March, beating its Numis Smaller Companies ex IT benchmark and the AIC UK Smaller Companies sector by close to 300 percentage points in the process. As was the case with most active managers, 2016 proved to be a difficult year for the strategy. NAV total returns were less than 4%, compared to 27.6% in 2015. By comparison, the reference index has returned around 8% in each calendar year. However, as the trust is managed on an unconstrained, stockselection basis, with a high degree of active share, divergence from the performance of the reference index is to be expected. The poor absolute and relative performance was driven by its lack of exposure to commodity-related stocks (areas that Harry usual avoids as few ever tend to meet his quality criteria). Nevertheless, on a 12-month view, the trust is now outperforming the index and this has been helped by the manager’s decision to rotate the portfolio away from UK domestic stocks to those with more international exposure. It’s worth noting that this rotation was a by-product of the team’s ‘Matrix’ stock screening rather than any macro or top-down view (see Portfolio section), but there are certainly merits in selling UK-orientated companies such as Rightmove, Secure Trust Bank and Dunelm given the ongoing concerns surrounding the potential impact of last year’s Brexit vote.
Nevertheless, the fact it holds UK smaller companies meant its discount had widened out over recent months to 9% as general sentiment towards the sector remains poor. The board aims to buy back shares if the discount widens past 8% and, over recent weeks, the discount has narrowed to 6%.
Porfolio Harry is a growth investor and runs a focused portfolio of around 55 UK small-caps, usually those with a market-cap of less than £1.5bn at the time of investment. He also has a preference for quality businesses (he argues that, contrary to regular schools of investment theory, lower risk means higher returns when it comes to small-caps) and avoids ‘blue sky’ stocks by only buying companies that are making money today. A key part of this process though is that Harry will ‘run his winners’. Though he will trim back his exposure if it grows to more than 5% of his total portfolio and will sell out entirely if a company becomes ‘demonstrably a large-cap’, he still holds the likes of Ted Baker, a stock he bought in 2003 at £3 a share (its share price is now more than £27). The trust invests in cash generative UK small- and mid-sized companies, typically those with net cash on the books at the quality end of the scale, using a clearly structured investment process broken into three distinct stages to identify target investments. Top-level guidelines steer the manager toward companies which can demonstrate real growth, have proven business models along with recurring revenues and particularly those which are cash generative. These companies are then screened via an in-house quant system called ‘Matrix’ that runs metrics across various factors including earnings momentum, directors’ dealings, price momentum and valuation. Stocks are scored on that basis, with purchase and sales target prices set. The final analysis is based on fundamental research and aims to uncover ‘false positives’, testing the ‘Matrix’ results. The emphasis here is on meeting the management and pinpointing the company’s position in its marketplace. This investment process results in a natural bias toward what Harry describes as ‘resilient’ higher-quality smaller companies (as the chart below shows, the portfolio is overweight healthcare, software and food and drink but underweight mining, financials and travel and leisure and housebuilders relative to the weighting in the index). This means the trust has tended to outperform when the market is in a less ebullient mood. The trust’s performance over the past two calendar years has been indicative of this.
This article was commissioned by Standard Life UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
1
www.trustintelligence.co.uk/investor
04.05.2017
international companies scored far higher across the board than more UK-orientated companies.
Standard Life UK Smaller Companies Asset allocation relative to benchmark 15
Gearing
5
in in g M
ra M ve ed la ia nd Le Bu i i s ld ur El in ec e g tr M ic at al er an ia d ls El ec tr on ic s Re al Es ta te O il an d G as
T
H ea lth ca re So ft w Fo ar od e an dD Su rin pp k or t Se rv ic es Re ta ile rs Fi na nc ia ls
0
Trust %
Numis SC ex IT index %
Source: Standard Life Investments
Highcharts
It significantly outperformed in 2015 as the trust had very little exposure to the oil and gas exploration and support services companies that were hit hardest by collapsing energy prices, and instead was positioned toward the UK consumer, and toward sectors with strong visible growth like software and healthcare, but then underperformed in 2016 as commodity-related stocks witnessed considerable mean reversion. Harry hasn’t been dipping his toe into these areas due to his disciplined investment process, but the overall shape of the portfolio has changed over recent months. For example, there has been a rotation away from UK-centric stocks (particularly UK cyclicals) and weightings to companies with more than 20% of their revenue generated overseas. The manager has sold the likes of Rightmove, MoneySuperMarket, Dunelm and Secure Trust bank and bought companies that generate more than 50% of their earnings outside the UK like RWS, Hilton Foods and 4imprint. The gradual changes within the portfolio are highlighted below.
The board has set parameters within which Harry is expected to operate. He is expected to manage the Trust such that it can be geared by up to 25% or hold up 5% of net assets in cash. Typically, however, Harry will not be geared by more than 15%. Harry has used this flexibility well, sheltering in cash during 2008 and in doing so protecting the trust from the level of downside witnessed by its peers – losing 27% while the average small-cap trust lost 51%. The trust’s gearing has fallen from around 12% three years ago and has hovered around the 5% mark over the past 12 months.
Returns Standard Life UK Smaller Companies has delivered significant outperformance since Harry took over the portfolio in September 2003. It has delivered a NAV total return of 669.4% over that time to the end of March 2017 while the Numis Smaller Companies ex IT index and the AIC UK Smaller Companies sector have returned 378.7% and 375.7%, respectively. Standard Life UK Smaller Cos: Performance vs indices 29/09/2003 - 30/03/2017 750
500
%
%
10
250
0
CHANGING EXPOSURES -250
CATEGORY
31/05/2016
18/10/2016
27/01/2017
Exporters
8.0%
7.7%
6.8%
Overseas (>50% revenues)
21.0%
32.0%
31.3%
UK & Overseas (>20% revenues)
12.6%
14.3%
20.9%
UK Defensives
13.0%
14.1%
11.7%
UK Growth
17.7%
18.0%
19.3%
UK Cyclicals
27.6%
13.8%
10.0%
Source: Standard Life Investments
As such, the trust is now less dependent on the strength of the UK economy or the UK consumer than last year. However, it is worth noting that this rotation wasn’t driven by Harry’s view of the UK or Brexit, but the results of his screening process as more-
2004
2006
2008
2010
Standard Life UK Smaller Co. Ord (Total) Numis SC Ex Invt Com TR GBP
2012
2014
2016
Morningstar IT UK SMC N
Source: Morningstar
Highcharts
The trust is also outperforming both the sector and its benchmark over one, three, five, seven and 10-year periods to the end of March. As the chart below shows, however, the trust’s focus on higher quality stocks has usually led it to lag in strongly rallying markets such as 2004, 2009 and 2013. As such, if investors do shake off concerns about Brexit and return to UK small-caps en masse, we would expect this trust to underperform on a relative basis. However, its outperformance has been generated when markets have been flat or falling. It lost considerably less than the index
This article was commissioned by Standard Life UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
2
www.trustintelligence.co.uk/investor
04.05.2017
in 2008 and fell half as far as the wider market in 2011 when the European sovereign debt crisis intensified. Standard Life UK Smaller Companies: Performance vs indices 2004 - 2016 75
50
%
25
0
-25
-50 2004
2006
2008
2010
Standard Life UK Smaller Co. Ord (Total)
2012
2014
2016
Morningstar IT UK SMC N
Numis SC Ex Invt Com TR GBP
Source: Morningstar
Highcharts
2014 was an exception to the rule as the trust underperformed by a wide margin with losses of 7.2% compared to the index’s losses of 1.9%. Harry described that as a highly unusual period for the strategy, noting that the trust was disproportionally hit by outflows from FTSE 250 trackers (many of its holdings at the time were constituents of the index) whilst also highlighting certain stock-specific disappointments such as ASOS.
dividend of 5.2p), has dividend cover of 0.7x. The trust has already increased its interim dividend (1.5p compared to 1.4p in 2016).
Management Harry Nimmo is one of the most experienced UK smaller companies fund managers in the business today, having joined Standard Life Investments in 1984, starting as an investment analyst. Harry started running smaller companies money for SLI in 1993, and has been running the top-performing Standard Life UK Smaller Companies open-ended fund since 1997. He took the reins on the investment trust in 2003.
Discount The discount widened earlier this year with Standard Life UK Smaller Companies having drifted out to 9% discount in early April. Its average discount, for example, has been 4.4% over the past five years and has traded on premiums as wide as 5% at points over that time. In addition, the board aims to limit the discount in normal market conditions if it widens past 8% and it showed willingness to buy back stock last year to protect investors.
Dividend
Standard Life UK Smaller Cos: Discount
Income has been and continues to be an increasingly important part of Harry’s strategy, noting that as many of his long-term holdings grow, they return more and more to shareholders in the form of dividends.
26/04/2012 - 26/04/2017 10
5
Indeed, the compound annual growth rate of the trust’s dividend has been 23.5% over the past 10 years – though the dividend yields has always remained low compared to more traditional equity income portfolios (today it stands at 1.7%).
%
0
-5
-10
-15 2013
Standard Life UK Smaller Companies: Dividend
2015
2016
2017 Highcharts
The discount has since narrowed to 6% at the time of writing, which is still wider than its five-year average.
8
6
%
2014
Source: Morningstar
2007 - 2016
Charges
4
2
0 2008
2010
Dividend per ordinary share
Source: Annual report
2012
2014
2016
Revenue return per ordinary share Highcharts
The trust has an OCF of 1.13%, which is around average for the AIC UK Smaller Companies sector. While it is slightly more expensive than some popular rivals such as Invesco Perpetual UK Smaller Companies and Throgmorton, unlike them, it does not charge a performance fee, having dropped it in 2012.
However, as the chart above shows, the trust has paid a covered and growing dividend over the past 9 years and (as of the latest annual report and taking into account the then proposed final
This article was commissioned by Standard Life UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
3
www.trustintelligence.co.uk/investor
04.05.2017
Important Information Standard Life UK Smaller Companies is a client of Investment Trust Intelligence. Research produced by Investment Trust Intelligence covering Standard Life UK Smaller Companies should be considered a marketing communication, and is not independent research. This report has been approved under section 21 of the Financial Services and Markets Act 2000 by Kepler Partners LLP for communication to retail clients and private persons as defined by the Financial Services Authority. This is a marketing document, and should be considered non-independent research as defined in COBS 12.3.2R. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, subject to restrictions imposed by internal rules. This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell. Any prices or quotations contained herein are indicative only. The information in this report is believed to be correct, but its accuracy or completeness cannot be guaranteed. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Please remember that past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. Independent financial advice should be taken before entering into any financial transaction. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.
Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority. Click here to read our terms and conditions.
This article was commissioned by Standard Life UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
4
www.trustintelligence.co.uk/investor
04.05.2017
Nevertheless, the fact it holds UK smaller companies meant its discount had widened out over recent months to 9% as general sentiment towards the sector remains poor. The board aims to buy back shares if the discount widens past 8% and, over recent weeks, the discount has narrowed to 6%.
Porfolio Harry is a growth investor and runs a focused portfolio of around 55 UK small-caps, usually those with a market-cap of less than £1.5bn at the time of investment. He also has a preference for quality businesses (he argues that, contrary to regular schools of investment theory, lower risk means higher returns when it comes to small-caps) and avoids ‘blue sky’ stocks by only buying companies that are making money today. A key part of this process though is that Harry will ‘run his winners’. Though he will trim back his exposure if it grows to more than 5% of his total portfolio and will sell out entirely if a company becomes ‘demonstrably a large-cap’, he still holds the likes of Ted Baker, a stock he bought in 2003 at £3 a share (its share price is now more than £27). The trust invests in cash generative UK small- and mid-sized companies, typically those with net cash on the books at the quality end of the scale, using a clearly structured investment process broken into three distinct stages to identify target investments. Top-level guidelines steer the manager toward companies which can demonstrate real growth, have proven business models along with recurring revenues and particularly those which are cash generative. These companies are then screened via an in-house quant system called ‘Matrix’ that runs metrics across various factors including earnings momentum, directors’ dealings, price momentum and valuation. Stocks are scored on that basis, with purchase and sales target prices set. The final analysis is based on fundamental research and aims to uncover ‘false positives’, testing the ‘Matrix’ results. The emphasis here is on meeting the management and pinpointing the company’s position in its marketplace. This investment process results in a natural bias toward what Harry describes as ‘resilient’ higher-quality smaller companies (as the chart below shows, the portfolio is overweight healthcare, software and food and drink but underweight mining, financials and travel and leisure and housebuilders relative to the weighting in the index). This means the trust has tended to outperform when the market is in a less ebullient mood. The trust’s performance over the past two calendar years has been indicative of this.
This article was commissioned by Standard Life UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
1
www.trustintelligence.co.uk/investor
04.05.2017
international companies scored far higher across the board than more UK-orientated companies.
Standard Life UK Smaller Companies Asset allocation relative to benchmark 15
Gearing
5
in in g M
ra M ve ed la ia nd Le Bu i i s ld ur El in ec e g tr M ic at al er an ia d ls El ec tr on ic s Re al Es ta te O il an d G as
T
H ea lth ca re So ft w Fo ar od e an dD Su rin pp k or t Se rv ic es Re ta ile rs Fi na nc ia ls
0
Trust %
Numis SC ex IT index %
Source: Standard Life Investments
Highcharts
It significantly outperformed in 2015 as the trust had very little exposure to the oil and gas exploration and support services companies that were hit hardest by collapsing energy prices, and instead was positioned toward the UK consumer, and toward sectors with strong visible growth like software and healthcare, but then underperformed in 2016 as commodity-related stocks witnessed considerable mean reversion. Harry hasn’t been dipping his toe into these areas due to his disciplined investment process, but the overall shape of the portfolio has changed over recent months. For example, there has been a rotation away from UK-centric stocks (particularly UK cyclicals) and weightings to companies with more than 20% of their revenue generated overseas. The manager has sold the likes of Rightmove, MoneySuperMarket, Dunelm and Secure Trust bank and bought companies that generate more than 50% of their earnings outside the UK like RWS, Hilton Foods and 4imprint. The gradual changes within the portfolio are highlighted below.
The board has set parameters within which Harry is expected to operate. He is expected to manage the Trust such that it can be geared by up to 25% or hold up 5% of net assets in cash. Typically, however, Harry will not be geared by more than 15%. Harry has used this flexibility well, sheltering in cash during 2008 and in doing so protecting the trust from the level of downside witnessed by its peers – losing 27% while the average small-cap trust lost 51%. The trust’s gearing has fallen from around 12% three years ago and has hovered around the 5% mark over the past 12 months.
Returns Standard Life UK Smaller Companies has delivered significant outperformance since Harry took over the portfolio in September 2003. It has delivered a NAV total return of 669.4% over that time to the end of March 2017 while the Numis Smaller Companies ex IT index and the AIC UK Smaller Companies sector have returned 378.7% and 375.7%, respectively. Standard Life UK Smaller Cos: Performance vs indices 29/09/2003 - 30/03/2017 750
500
%
%
10
250
0
CHANGING EXPOSURES -250
CATEGORY
31/05/2016
18/10/2016
27/01/2017
Exporters
8.0%
7.7%
6.8%
Overseas (>50% revenues)
21.0%
32.0%
31.3%
UK & Overseas (>20% revenues)
12.6%
14.3%
20.9%
UK Defensives
13.0%
14.1%
11.7%
UK Growth
17.7%
18.0%
19.3%
UK Cyclicals
27.6%
13.8%
10.0%
Source: Standard Life Investments
As such, the trust is now less dependent on the strength of the UK economy or the UK consumer than last year. However, it is worth noting that this rotation wasn’t driven by Harry’s view of the UK or Brexit, but the results of his screening process as more-
2004
2006
2008
2010
Standard Life UK Smaller Co. Ord (Total) Numis SC Ex Invt Com TR GBP
2012
2014
2016
Morningstar IT UK SMC N
Source: Morningstar
Highcharts
The trust is also outperforming both the sector and its benchmark over one, three, five, seven and 10-year periods to the end of March. As the chart below shows, however, the trust’s focus on higher quality stocks has usually led it to lag in strongly rallying markets such as 2004, 2009 and 2013. As such, if investors do shake off concerns about Brexit and return to UK small-caps en masse, we would expect this trust to underperform on a relative basis. However, its outperformance has been generated when markets have been flat or falling. It lost considerably less than the index
This article was commissioned by Standard Life UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
2
www.trustintelligence.co.uk/investor
04.05.2017
in 2008 and fell half as far as the wider market in 2011 when the European sovereign debt crisis intensified. Standard Life UK Smaller Companies: Performance vs indices 2004 - 2016 75
50
%
25
0
-25
-50 2004
2006
2008
2010
Standard Life UK Smaller Co. Ord (Total)
2012
2014
2016
Morningstar IT UK SMC N
Numis SC Ex Invt Com TR GBP
Source: Morningstar
Highcharts
2014 was an exception to the rule as the trust underperformed by a wide margin with losses of 7.2% compared to the index’s losses of 1.9%. Harry described that as a highly unusual period for the strategy, noting that the trust was disproportionally hit by outflows from FTSE 250 trackers (many of its holdings at the time were constituents of the index) whilst also highlighting certain stock-specific disappointments such as ASOS.
dividend of 5.2p), has dividend cover of 0.7x. The trust has already increased its interim dividend (1.5p compared to 1.4p in 2016).
Management Harry Nimmo is one of the most experienced UK smaller companies fund managers in the business today, having joined Standard Life Investments in 1984, starting as an investment analyst. Harry started running smaller companies money for SLI in 1993, and has been running the top-performing Standard Life UK Smaller Companies open-ended fund since 1997. He took the reins on the investment trust in 2003.
Discount The discount widened earlier this year with Standard Life UK Smaller Companies having drifted out to 9% discount in early April. Its average discount, for example, has been 4.4% over the past five years and has traded on premiums as wide as 5% at points over that time. In addition, the board aims to limit the discount in normal market conditions if it widens past 8% and it showed willingness to buy back stock last year to protect investors.
Dividend
Standard Life UK Smaller Cos: Discount
Income has been and continues to be an increasingly important part of Harry’s strategy, noting that as many of his long-term holdings grow, they return more and more to shareholders in the form of dividends.
26/04/2012 - 26/04/2017 10
5
Indeed, the compound annual growth rate of the trust’s dividend has been 23.5% over the past 10 years – though the dividend yields has always remained low compared to more traditional equity income portfolios (today it stands at 1.7%).
%
0
-5
-10
-15 2013
Standard Life UK Smaller Companies: Dividend
2015
2016
2017 Highcharts
The discount has since narrowed to 6% at the time of writing, which is still wider than its five-year average.
8
6
%
2014
Source: Morningstar
2007 - 2016
Charges
4
2
0 2008
2010
Dividend per ordinary share
Source: Annual report
2012
2014
2016
Revenue return per ordinary share Highcharts
The trust has an OCF of 1.13%, which is around average for the AIC UK Smaller Companies sector. While it is slightly more expensive than some popular rivals such as Invesco Perpetual UK Smaller Companies and Throgmorton, unlike them, it does not charge a performance fee, having dropped it in 2012.
However, as the chart above shows, the trust has paid a covered and growing dividend over the past 9 years and (as of the latest annual report and taking into account the then proposed final
This article was commissioned by Standard Life UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
3
www.trustintelligence.co.uk/investor
04.05.2017
Important Information Standard Life UK Smaller Companies is a client of Investment Trust Intelligence. Research produced by Investment Trust Intelligence covering Standard Life UK Smaller Companies should be considered a marketing communication, and is not independent research. This report has been approved under section 21 of the Financial Services and Markets Act 2000 by Kepler Partners LLP for communication to retail clients and private persons as defined by the Financial Services Authority. This is a marketing document, and should be considered non-independent research as defined in COBS 12.3.2R. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, subject to restrictions imposed by internal rules. This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell. Any prices or quotations contained herein are indicative only. The information in this report is believed to be correct, but its accuracy or completeness cannot be guaranteed. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Please remember that past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. Independent financial advice should be taken before entering into any financial transaction. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.
Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority. Click here to read our terms and conditions.
This article was commissioned by Standard Life UK Smaller Companies and is a marketing document. It should be considered non-independent research as defined in COBS 12.3.2R
4
www.trustintelligence.co.uk/investor
04.05.2017
