Old Mutual UK Select Smaller Companies Fund Offshore Income

Smaller company shares endured a difficult 2011. Investors shied away from higher risk investments and favoured more cautious assets as the euro zone crisis intensified. Even managers with superb long-term track records in the sector struggled, including Dan Nickols, manager of the Old Mutual UK Select Smaller Companies Fund.

Dan Nickols positioned the fund for robust growth from UK smaller companies in early 2011. Despite an uncertain economic environment, the area offered some exciting opportunities and the fund was less defensively invested than some of its peers. It had a bias towards more economically sensitive sectors such as software, media, and chemicals.

As the year progressed and the euro zone problems escalated, market volatility continued and even good quality, cash generative companies were sold off by investors. Over the summer months, Dan Nickols reduced the fund's holdings in companies exposed to the lower growth prospects of the Western hemisphere. This included companies such as the electrical firm Morgan Crucible, and technology company, IQE. These turned out to be timely decisions as the stocks subsequently fell further.

By late summer, there was greater emphasis in the portfolio towards robustly-financed companies selling products to the more buoyant emerging markets. He also favoured certain firms in the resources sector, particularly those with the ability to increase their investment in order to grow their business. By contrast, he stayed away from areas related to government spending and the UK consumer, where he felt the outlook was weaker. This positioning has proved shrewd and the fund has recovered well compared to some of its peers.

Looking ahead Dan Nickols has been repositioning the portfolio by adding to companies whose share prices have the potential to respond significantly to positive news flow. Examples include tool hire firm, Speedy Hire, and the industrial transport firm Wincanton.

While the fund's performance has been somewhat pedestrian over the last year, its strategy, which focuses on identifying where we are in the business cycle and investing in the growing sectors of the market, can take time to bear fruit. Smaller companies currently appear attractively valued, although they are higher risk. Nonetheless we believe the Old Mutual team have the skills to deliver excellent long-term returns. The fund therefore remains a component of the Wealth 150 list of our favourite funds in each sector.