standard life manager encouraged by high level of directors' dealings
Mark Niznik, manager of Standard Life Investments' newly-launched UK Opportunities Fund, is now more positive on the prospects of mid and small cap companies than he has been at any time in the past decade. This optimism is based on what he sees as compelling valuations and the high level of director dealings.
Niznik, who worked at Perpetual until April 2002, focuses on companies with strong business franchises that are undervalued by the market.
A confirmed stockpicker, who estimates he had 500 company management meetings in 2002 alone, Niznik does not run his portfolios along sectoral lines. With mid and small caps in the UK market on a 2.5% discount to the FTSE 100 and with P/Es down at 11 times, Niznik believes the market backdrop favours his investment style.
He talks to Investment Week about his fund and how life at Standard Life Investments differs from his Perpetual days.
How many stocks do you hold in the portfolio?
The fund has 60 companies. As time goes by, and were the fund to grow substantially in size, that could increase to between 80 and 100 ' possibly even more. It depends on how the fund grows and what opportunities are available. At Perpetual, the UK part of the Global Smaller Companies fund that I ran for seven years held between 75 and 100 holdings.
What types of companies do you typically hold?
I am running the fund in the same way that I have run money over the past decade. I look for companies with strong business franchises that are being undervalued by the stock market.
Although many select opportunities funds look for specific types of companies, the name of my fund is not meant to imply that it is only buying stuff that is out of favour. My style is not about buying any company that is cheap.
All the companies within the fund need to have a good quality business franchise. When I buy companies, they will be from outside the FTSE 100, but if a mid cap stock is promoted to the large cap index, and I remain confident on its prospects, I will run with it. There is no requirement to sell.
Do you meet the management of all the companies you invest in?
In most cases yes, the research process involves meeting management.
An advantage with Standard Life Investments, because we are so big, is there is no shortage of companies wanting to come in and see us. I also go to meet them at their premises.
In the 2002 calendar year I had around 500 one-on-one meetings with company management.
Are dividends important?
Not per se, but cashflow is important. It is the cash generation of companies that drive share prices. Whether the company wants to pay it out as a dividend to its shareholders or wants to re-invest the cash to that business is a call the directors make on the returns that they can get within the business.
What percentage of the fund is in mid and small caps?
Currently about half is in mid caps and half in small caps. I'm very comfortable with this position. Should more opportunities occur in either the small or mid cap areas in the future, then I wouldn't hesitate to change that if I thought it was in the best interest of the fund. Technically, I could go as high as 100% small or mid caps, but that is unlikely to happen.
Is it possible with your small cap history that you could have more of a bias to the lower area of the market?
Yes, I probably would have a natural bias because that is where my experience lies and experience accounts for an awful lot when building up knowledge of companies.
It is important to remember, however, that at Perpetual I was benchmarked against the Hoare Govett, which is the bottom third of the market.
So I was already familiar with about half of the mid cap universe in any case.
How big will a single holding be in your fund? The maximum I am allowed is 5% of the fund. That is written into the mandate.
Do you have a top-down overlay as well as being a stockpicker?
I tend to really be a stockpicker. However, I do also pay attention to what is happening in the economy, for example, what interest rates are doing etcetera, but this is really just secondary for me.
There are plenty of far cleverer economists than me, who have a better opinion of what the markets are doing.
As a result of the stock section are there any sector or thematic biases within the portfolio?
With this fund I don't pay attention to sector weightings, however the major sectors within the fund are retailers (14% of the portfolio), media (12%), leisure and aerospace (both 11%). All of these sectors are represented with overweight positions.
As part of my job in the small-cap team, I'm the retail sector analyst. I am, in fact, slightly negative on retail as I believe the consumer is going to slow down.
However, within this fund there happens to be four or five companies I really like and consider strong enough to survive the downturn.
My main holdings are SCS Upholstery, French Connection and Merchant Retail Group. They all have strong business franchises and strong track records that differentiate them from other retailers on the high street.
Are there any dominant themes in terms of your view on media, leisure and aerospace?
Advertising revenue has been negatively affected by the global economic downturn and many of the media stocks are now trading on bombed-out valuations relative to the past five years. I like the idea that there are many quality companies that are now trading cheaply. In the media sector the larger holdings are Sanctuary, Bloomsbury Publishing, EuroMoney, and Taylor and Francis.
The view on leisure is purely down to individual positive factors. The companies I hold in this sector include Holiday Break, First Choice and Green King. Holiday Break is particularly interesting, and due to a number of acquisitions now controls more than 70% of the European camping market. This enables it to negotiate much better rates with campsite owners and to cut their marketing spend.
I have liked aerospace and defence companies for a long time as the barriers of entry to get into that are very high, as the quality of engineering must be very good.
Generally people are concerned that a war in the Middle East will discourage people from flying and so affect profits. This has created an overly pessimistic view of the market, but generally this is a growth market.
More and more people fly each year, it's just that we are going though a dip and I would rather buy in that dip. Companies that I own include Meggitt, Chemring, Alvis and VT Group.
Can you take opposing stock views to fund managers like Harry Nimmo, head of UK smaller companies?
If I am negative on something and Harry is positive, we will have some debate on our reasons why and it is often very useful to consider someone else's view but there is no requirement to stick with that same view.
This is the case with any team members. At the end of the day I am responsible for this fund and have to be happy with every holding in it so I'm not required to hold anything that I do not want.
Do you set price targets or stop losses?
In both cases no. In particular, I don't believe in stop losses. I believe that if I do my research properly, and have a view of what the company is worth, then if the price goes down, that makes the company even better value than it was.
Do you tend to trade this fund or is it more buy and hold?
When buying companies I generally have an investment horizon of between two and five years. In the money that I have run in the past, the average portfolio turnover has varied between 40% and 60% (purchases plus sales).
Having said that, I have already taken some profits in a couple of things and it's only been three months. This was mainly due to market volatility.
Is there any company you bought near the fund's launch and have since changed your mind about?
Yes. I bought a holding in Reg Vardy, the car dealer. Its interim figures were quite disappointing at a time when I expected it would do a lot better. I halved the 1% holding that I held in this company.
Why are you so bullish currently?
I am more bullish on small and mid caps than I have ever been. There are several reasons why I hold this positive view.
The first reason is that stock markets have been so weak for so long.
I do concede that just because it has fallen for three years in a row, there is no magic floor to stop it from falling a fourth. However, the odds are stacked in our favour.
The second reason is that mid and small caps are now on the cheapest absolute P/E ratio that they have been on for a decade, at about 11 or 12 times earnings.
Thirdly, small and mid caps are now trading on one of the highest relative discounts that they have been on for the past 25 years.
Over the past 25 years, the small and most of the mid caps have traded on par with the All Share index. Now they are on a 25% discount to that average.
Added to all of this there is also a very high level of director buying. Toward the end of last year, the buy-to-sell ratio reached something like 16:1.
The last peak in director dealings was back in autumn 1998, when there was the Asian crisis and Long Term Capital Management blew up. That was just before a very good 1999 for stock markets.
We have seen the same levels of director share dealing recently, and it has also been concentrated into mid and small caps.
How does working here differ to Perpetual?
Standard Life is a much bigger, more structured organisation.
Most of the money that this company runs is pensions and life money, so the criteria under which the money is run is stricter.
Perpetual, as a retail fund house, left the fund managers alone to do whatever they think is right in the best interest of their fund and there were less stringent rules.
That said, I am left alone to do what I want with the UK Opportunities fund.
FUND MANAGER: Mark Niznik
Mark Niznik joined Standard Life Investments in April 2002 to work on the smaller companies team and manage the UK Opportunities fund that was launched last November.
Previously, he spent nine years at Perpetual, where he managed the UK smaller companies portion of global funds, and more recently mainstream UK small companies portfolios.
Between 1987 and 1993 he was discretionary private client fund manager and smaller companies analyst at Greig Middleton, London.
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