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Merian UK Smaller Companies – little can go a long way

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Dan Nickols is investing more in UK domestic companies
  • Around half the earnings of companies in the fund are still from overseas though
  • Recent performance is disappointing, but has been excellent longer term

Our view

Smaller companies in the UK are some of the most exciting and innovative around. Even though they’re small, many of them think big and operate internationally as well as in the UK. They often have more growth potential than larger companies, but they’re higher risk. When markets are volatile, smaller companies can be the worst hit.

Many UK smaller companies funds fared badly during the market turbulence at the end of 2018. But some are still among the best-performing funds across all sectors over the long term. Merian UK Smaller Companies, run by Dan Nickols, is one of them.

Nickols has achieved this by changing the fund in response to the shifting economic climate, combined with excellent stock picking. He hasn’t always got it right, but he’s shown he’s a skilled manager over the long run. We rate Nickols and his team highly, but there are other excellent managers who run funds at lower cost. So the fund isn’t on the Wealth 50 list of our favourite funds.

How’s the fund performed?

Nickols has delivered superb performance since he took over the fund in January 2004. In that time the fund's grown *706.9% compared with 174.2% for the FTSE Small Cap index. That doesn’t mean the fund will keep doing as well in the future, as past performance doesn’t guarantee future returns.

The fund had a disappointing year. In the 12 months to 31 January 2019 it fell 11%, while the FTSE Small Cap index fell 9.7%. Even managers with excellent long-term performance go through periods of short-term poor performance.

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2019

Annual percentage growth
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
Merian UK Smaller Companies -0.6% 13.9% 22.0% 33.0% -11.0%
FTSE Small Cap ex Investment Trust -5.1% 5.8% 20.8% 13.3% -9.7%

Past performance is not a guide to the future. Source: Lipper IM to *31/01/2019

What’s changed in the fund?

Nickols took some profits from Fevertree and BluePrism last year. They'd both performed strongly and he doesn't think their growth potential is as high as it once was.

He sold video game services company Keywords Studios and flooring manufacturer Victoria, which had also both done well. He also sold Conviviality, owner of Bargain Booze, before it went into liquidation after a series of profit warnings.

New investments include pub owner EI Group and real estate developer Helical. Nickols thinks their shares don't reflect their true growth potential and could rise from current levels. He also invested more in Savill’s for the same reason. It earns 70-80% of its money abroad, so it adds some international diversification.

Companies across the fund earn roughly half their money abroad on average. The share prices of a lot of domestically-focused businesses are starting to look more attractive though because they've been out of favour for a while. Nickols is using this opportunity to invest more in them so he expects the portfolio’s UK earnings to increase.

Brexit uncertainty continues to worry investors. But Nickols thinks a ‘soft’ Brexit is more likely than a ‘hard’ or ‘no-deal ‘one. He's encouraged to hear it's business as usual for the companies he invests in and expects them to do well, whatever lies ahead.

Find out more about Merian UK Smaller Companies including charges

Key Investor Information

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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