Comment: Small is beautiful at Standard Life trust

Bill Jamieson. Picture: Ian Rutherford

Bill Jamieson. Picture: Ian Rutherford

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When an investment trust has risen 200 per cent in five years, investors may be understandably inclined to consider banking their profits and moving on.

But when the trust is Standard Life UK Smaller Companies, managed by the acclaimed Harry Nimmo, I suspect very few will be inclined to do so.

It is ten years to the month since Standard Life took over the management of this trust. Over that period, it has delivered a net asset value total return of 374 per cent, representing an annualised return of 17.2 per cent. It has outperformed the company’s benchmark, the Numis Smaller Companies Index, by 4.4 per cent a year.

Indeed, so popular has its “big sister” unit trust become that it has been “soft closed” to investors.

Assets under management at the investment trust have grown from a low of £30 million to a high of more than £220m, while returning £48m to shareholders through a tender offer, share buybacks and special dividends.

Nor does this performance show much sign of flagging. For the year ended 30 June, the trust’s net asset value total return was 32.3 per cent, again outperforming the benchmark (31.8 per cent). If approved at the annual meeting, the final dividend will give a total for the year of 4.05p a share, up 30.6 per cent on a year ago.

And when the trust holds its annual meeting a week tomorrow – in London for the first time, a reflection of its huge popularity with investors south of the Border – Harry Nimmo will set out three sound reasons why smaller companies are set to outperform larger ones for another ten years.

The trust has had an astonishing run – all the more exceptional when you consider that the period spans the global financial crisis and one of the most turbulent periods in financial markets. UK-orientated smaller company funds in the main avoided the worst of the collapse in bank shares. But when confidence plummeted, many investors fled towards the FTSE 100’s solid defensive characteristics and dividend-paying capacity.

But this downturn did not see the expected smaller company carnage. First, smaller companies were able to respond more quickly and batten down the hatches. Second, they were in niche markets or business services which saw a growth in outsourcing by large companies, which worked to the benefit of the small-scale supplier.

And third, they were to prove much more open to the opportunities opened up by new technology – the explosive growth in the internet and in e-commerce in particular. Many forged new methods of product or service delivery, while larger companies with a heavy high street presence were slow to respond to the flight of customers to the internet.

One of the trust’s biggest shareholdings is in Asos, the online clothing retailer. Its shares rose 128 per cent over the last financial year. The trust also has big holdings in soft furnishings retailer Dunelm (up 92 per cent), fashion label Ted Baker (up 89 per cent) and financial services group Hargreaves Lansdown (68 per cent).

I had the pleasure of meeting Harry Nimmo over lunch in Edinburgh last week. He was in no mood to signal that the extraordinary good run for the smaller-cap sector was set to end any time soon – on the contrary. He believes the forces that have helped to propel performance are set to deliver superior performance over larger companies for another decade.

He cites three reasons. First, regulatory scrutiny of the banking sector is set to tighten and keep structural upheaval on the agenda for the forseeable future. Second, the twin engine of Chinese super-growth and the mining super-cycle which has forced up raw material prices is losing force as the Chinese economy turns towards consumer goods and services.

Finally, 4G, iPads and the mobile internet “are likely to continue the current period of mass corporate extinction for businesses that have been slow to adapt to the online world”.

These themes, he argues, “remain bad for large companies and generally good for smaller companies”.

This view now chimes strongly with a rotational shift under way in global markets towards smaller capitalisation “high beta” stocks. The MSCI World Small Caps Index is up almost 22 per cent already this year, touching a record high last week.

Shares in the Morningstar Gold Star rated trust are standing at 284p and a control mechanism has virtually eliminated the discount to net assets. For private investors keen to gain professional exposure to a sector that requires careful and continuous analysis and monitoring, this is a trust with a proven record – and, with its regular savings plan, an ideal point of entry.

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