Standard Life UK Smaller Companies Trust: October 2021 update

• Harry Nimmo is a pioneer when it comes to investing in smaller companies
• His investment approach has been consistent throughout his management career
• The trust’s focus on high-quality companies suffered over its last financial year
• Over the long term performance has been exceptional, a function of strong stock picking

How it fits in a portfolio

The Standard Life UK Smaller Companies Trust aims to grow your investment over the long-term by investing in the UK’s big companies of tomorrow. Smaller companies typically have more room for growth than larger ones, although they are more volatile and higher risk. This trust could add diversification to the UK portion of a more adventurous portfolio. The managers’ growth-focused investment style also means it could complement other trusts investing more in companies perceived to be undervalued.

When investing in closed-ended funds you should be aware the trust can trade at a discount or premium to net asset value (NAV).

Manager

With a career spanning over three decades, Harry Nimmo is one of the most experienced smaller companies investors. Since joining Standard Life Investments (subsequently Aberdeen Standard Investments) in 1985 he’s spent most of his career analysing small businesses with big potential. We admire his investment approach, which has been replicated across many other smaller companies funds with great success.

Given how long Nimmo has managed funds, questions around his retirement are natural. At the moment he remains focused on fund management and is a valuable resource for future successors and other team members.

Abby Glennie, Deputy Head of Smaller Companies, was named co-manager in November 2020. She started her career at Kames Capital before joining what was then Standard Life Investments in 2013. Most of her time has been spent analysing UK companies and in 2016 she joined the smaller companies team. With 14 years of industry experience, Glennie is building a strong track record.

The managers are also responsible for other funds and trusts focused on small and medium-sized companies. Given the overlap in approach and support from a dedicated team, we think they can comfortably manage their workload.

Process

The trust’s investment approach has remained the same since Nimmo started managing it in 2003. He and his team use a quantitative tool called ‘the matrix’ to help with the heavy lifting. It gives every company a score based on its quality, growth prospects and the momentum behind its earnings and share price. This enables the managers to exclude weaker candidates such as loss-making or highly indebted companies. They like businesses that perform well throughout a market cycle, so they tend to avoid those with earnings that are tied to the fate of the wider economy.

This whittles a universe of approximately 700 companies down to a final shortlist of around 100 companies for the team to investigate and debate further. Companies in the trust are usually still managed by their founders or led by a proven management team. They should also possess barriers to entry from competition, a sustainable business model and the ability to raise prices without significantly impacting demand. Meeting each company's management team is another crucial part of the managers’ due diligence.

The final portfolio consists of around 50 companies. The managers’ focus on momentum means they stay invested as companies grow. As a result, around 30% of the trust is invested in the FTSE 250 (medium-sized companies). We don’t see this as a bad thing though. Medium-sized companies are often seen as the UK stock market's ‘sweet-spot’ – they have more growth potential than larger businesses but are lower risk than smaller ones. This doesn’t make them a sure thing of course.

Sector wise, the managers tend to find plenty of opportunities in the industrials, financials and consumer facing sectors. Recent investments include IT services provider Bytes, which was listed on the stock market for the first time through an IPO (Initial Public Offering). The managers think it’s a high quality business with the potential to benefit from increasing digitisation over the coming years. They also invested in Watches of Switzerland, a firm they believe to be the supplier of choice for many watch brands. Other new investments include online marketplace Auction Technology Group and private equity company Draper Esprit.

In contrast, they sold their investment in online rail and coach ticket platform Trainline. The announcement of a competing online system from GB Rail raised concerns about its prospects. Three companies were also sold because they were no longer considered to be ‘small’. These included retailer JD Sports, IT company Aveva and Dechra Pharmaceuticals.

The managers use gearing (borrowing to invest), which can boost gains but also increases losses, so it’s a higher-risk approach. They can invest in derivatives too which, if used, also adds risk.

Culture

The trust was previously part of Standard Life plc, until the business merged with Aberdeen Asset Management in 2017 to create Standard Life Aberdeen plc. This later became Aberdeen Standard Investments and in July 2021, the company changed name once again to abrdn in order to simplify and unite under one single brand. That said, the trust maintains the same 'Standard Life' moniker.

While mergers have the potential for disruption, we think the smaller companies team, which also includes UK and European funds, were relatively unaffected. There’s a collegiate feel to the smaller companies team at abrdn. Members share research and ideas with each other, and work with one another to debate and challenge stock decisions.

Although the managers’ process doesn’t specifically exclude any particular area, ESG (Environmental, Social and Governance) considerations form a part of company analysis. The managers engage with companies where they feel there are serious ESG issues and use their right to vote at shareholder meetings.

Cost

The trust's ongoing charge for the year ended 30 June 2021 was 0.88%, which is slightly lower than the 0.91% for 2020. If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.

Investors should refer to the latest annual reports and accounts and Key Information Document for details of the risks and charging structure.

Performance

Performance has been strong since Nimmo started managing the trust in 2003. Over this period, the trust’s share price has risen by 1879%* vs 825.6% for the AIC UK Smaller Companies sector average. Our analysis puts this down to Nimmo’s impressive stock picking. Past performance is also not a guide to future returns, and smaller companies trusts should be held for long periods of time.

During periods of market weakness, the managers' focus on high-quality companies has meant the trust has usually held up better than the broader market. The trust’s also tended to outperform in rising markets, although we expect it to not do quite as well when unloved companies perceived to be undervalued are in vogue.

This was the case during the trust’s latest financial year (ending 30 June 2021). Over this timeframe the trust’s net asset value (NAV) grew by 41.9% vs 60.7% for the AIC sector average. The share price also rose by 46.9%, however the dividend per share remained unchanged at 7.7p.

Compared to the benchmark, investing more in technology and less in sectors like energy and basic materials helped performance during the financial year. In contrast, a greater weighting in consumer sectors and industrials held back returns.

The trust has still delivered good returns though and there have been some success stories at a stock level. For example, media company Future was one of the leading performers, boosted by solid growth in digital advertising. Impax Asset Management was another strong performer. As an ESG specialist, the company’s assets under management (AUM) have continued to rise as investors shift to more sustainable solutions. Other notable performers include software company Kainos and Alpha Financial Markets.

Past performance isn't a guide to the future. Source: *Lipper IM to 30/09/2021.

Find out more about Standard Life UK Smaller Companies Trust including charges

View Standard Life UK Smaller Companies Trust Key Information Document