By James Phillipps Outperformance in the small cap market is not reliant on technology with old eco...
By James Phillipps
Outperformance in the small cap market is not reliant on technology with old economy sectors providing good growth opportunities, according to Harry Nimmo, of Standard Life Investments.
Nimmo, fund manager of Standard Life's smaller companies Oeic, said changes in the market have facilitated the wider availability of capital for smaller companies. He said: "One of the reasons for the failure of small caps in the 1980s was the rise of tracker funds which drew money out of active funds and smaller companies.
"Things have dramatically changed for the better. The sector has been restructured and small companies offer spectacular returns to the client. Valuations are modest at the moment historically, and tracker funds are in decline."
The waking up of asset allocators to small companies and a decline of tracker funds has made it easier for these companies to raise money in the stock market, he said: "New ideas need to raise equity capital and companies can do this now, even in a poor stock market environment," Nimmo said.
"Smaller companies thrive in eras of rapid business change. In the past two years, we have seen evidence that there are new ways of doing business."
The beneficiaries are not solely IT stocks either, he noted, wary of having his Oeic labelled a quasi-technology fund. His tech weighting peaked at 23%, but has been cut back in a bid to mitigate volatility.
Nimmo is still keen on the sector though. He added: "I think there will be tremendous opportunities to buy IT stocks in 2001."
Describing his current holdings, Nimmo admitted: "The companies are boring, but they are fitting my criteria and earnings upgrades are coming through." He pointed to the furnishings and electrical retailer, Courts, as an example.
Despite being a family run company, excluded from the All Share since last December, it has performed well year to date. "Courts is one of the few UK success stories of retailers internationally," Nimmo said.
"It is the largest electrical and furnishings retailer in Fiji, Malaysia, Bali and it is moving into South Africa. It has a strong hire-purchase structure and has beaten earnings expectations twice year to date, but it is a multi-year thing."
Within the old economy sectors Nimmo also holds Iceland and McCarthy & Son.
Explaining the criteria he works by, Nimmo said: "Some 80% of the fund must be members of the Hoare Govett to maintain its small companies character. I typically hold 50-60 stocks, currently it is 52, and I do not hold any unlisted companies. I take account of risk and try and target 1.5-2% of the fund per holding and I don't go over 5%. I keep Aim stocks below 5% of the portfolio and it is currently about 2.5%."
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