Standard Life UK Smaller Companies Trust: September 2020 update

• Harry Nimmo is a talented and longstanding manager in the UK smaller companies sector
• He's delivered good long-term results for investors, although there are no guarantees about the future
• The manager is prepared to 'run his winners', holding on to companies until they grow into larger firms

How it fits in a portfolio

The UK smaller companies sector is home to hundreds of businesses of all shapes and sizes. Harry Nimmo, manager of Standard Life UK Smaller Companies Trust, looks for smaller companies that have more room to grow than larger ones, which could aid long-term growth. At the same time, smaller businesses are more volatile and higher risk. We think this trust could work well as part of an adventurous investment portfolio, and could diversify trusts or funds focused on global or larger UK companies.

Manager

Harry Nimmo is one of the fund industry's most experienced and successful smaller companies managers. He has managed the open-ended ASI UK Smaller Companies Fund since 1997 and Standard Life UK Smaller Companies Trust since 2003, and delivered impressive long-term returns. We admire his longstanding investment approach, which has been replicated across a number of ASI smaller companies funds with great success.

While Nimmo helps to manage a number of portfolios, they’re all run in a similar way and share some of the same companies, so we think he’s able to devote enough time to each. He also gave up his team management responsibilities in February, which frees up time to focus on fund management. He has a well-resourced team around him to help manage the portfolios, provide investment ideas, and carry out company analysis.

Process

Nimmo looks for UK companies outside the usual candidates of larger firms that dominate the stock market. He believes smaller companies have greater long-term growth potential, and are relatively under-researched, which provides plenty of opportunity to spot ideas missed by others.

To help whittle down the broader universe of UK smaller companies, the manager uses an in-house system called the Matrix. This provides a score on the quality of each business, its growth prospects and the momentum behind its earnings and share price. This reduces the range of companies to a much smaller shortlist, which Nimmo and his team can then investigate and debate further.

The trust recently released its annual results for the year to 30 June 2020, outlining some of the newer investments made this year. This includes Greggs, which benefited from the launch of its vegan sausage roll and steak bake. However, the manager later reduced this investment, due to post-Covid challenges such as quieter high streets and shopping centres.

Focusrite is another new holding. It's a worldwide leader in the manufacture and marketing of music equipment, which can be used at home and professionally. It could benefit as music is increasingly being made at home, and the Covid pandemic has accelerated this trend.

On the other hand, a number of investments were significantly reduced after growing too big to be classified as smaller businesses. This includes financial services company Capital Group, Dechra Pharmaceuticals, JD Sports Fashion, global life sciences company Abcam, and Fevertree Drinks. The latter was sold completely.

The manager has the ability to use gearing (borrowing to invest) and derivatives with the aim of enhancing returns. However, there are no guarantees and the use of these strategies increases 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. The trust now falls under the new group’s investment business, Aberdeen Standard Investments, though it 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. They’ve been largely left alone to continue running their funds as they have always done. There’s a collegiate feel to the smaller companies team at ASI. Members share research and ideas with each other, and work with one another to debate and challenge stock decisions.

While the manager's process doesn’t specifically exclude any particular area, ESG (Environmental, Social and Governance) considerations form a part of company analysis. Active engagement and other stewardship activities such as shareholder voting is also an important part of the process.

Cost

The trust's ongoing charge for the year ended 30 June 2020 was 0.88%, which is slightly lower than the 0.90% for 2019. The ongoing charges figure for the year is the lowest it has been over the trust's lifetime. Investors should refer to the latest annual reports and accounts and Key Investor Information for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform fee of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. Our platform fee doesn’t apply if held in a Fund and Share account.

Performance

Nimmo has an excellent long-term track record, and the trust has performed much better than its benchmark over the manager's tenure since 2003*. Performance has been volatile at times though, especially given the focus on smaller businesses, and past performance isn't a guide to future returns.

The fund also performed well over the year to 30 June 2020. While the NAV (Net Asset Value) and share price fell 0.5% and 0.1% respectively, it held up much better than the loss of 10.7% for the benchmark. This is typical of the trust's longer-term performance profile.

The strongest performers were either more defensive or beneficiaries of Covid-19, including leisure goods, food manufacturers and telecoms. Media and electronics stocks also held up well. The top contributors to performance were Games Workshop, Hilton Foods and Future, which makes special interest magazines.

Transport and leisure companies, restaurants, and retailers struggled. Other companies that have tended to be more sensitive to the health of the economy, including those in the construction, building materials and resources sectors also didn't do so well. Weaker performers included Fevertree Drinks, digital advertising company Next15 Communications, and recruitment group Robert Walters.

While Nimmo is confident in his longer-term outlook for smaller companies, he believes the stock market recovery could see setbacks with the potential for spikes in Covid outbreaks, a vaccine some way off, and difficult Brexit negotiations ahead. That said, Covid has accelerated change with the internet of things, cloud computing and other technological breakthroughs. Overall, the manager continues to focus on quality companies with the potential for positive earnings growth.

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2020.

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

Standard Life UK Smaller Companies Trust PLC investor information