Optimism prompts Old Mutual head to boost weighting to mid caps

Dan Nikols, the head of small companies at Old Mutual Asset Management, has introduced exposure to companies with about £250m market capitalisation as risk appetite returns to the market.

Since January, Nikols has added 5% exposure in the £522.5m Old Mutual UK Select Smaller Companies fund that are at the lower end of his universe of £250m to £1 billion market cap companies.

He says: “Initiatives like the long-term refinancing operations in Europe and better global macroeconomic data together are indicating an improving picture and improved risk appetite. For that reason, we have been adding more risk to the portfolio.”

Nikols adds: “During times of risk-aversion, those companies at the lower end of the market cap spectrum get overlooked. We have taken on exposure to a range of smaller, cheaper companies at the bottom end of our market cap spectrum at £250m and below in anticipation of them re-rating.

“To do this, we have added exposure through a spread of units rather than three or four, as moving money around quickly in companies that are really small is difficult.”

New positions include Smiths News, a newspaper distributor, Phoenix IT, Wincanton, a supply chain solutions provider, which all have 0.2% positions. Smith News has a market cap of £169.3m, Phoenix IT is £149.3m and £92.5m Wincanton.

Another theme in the portfolio that Nikols has used to add more risk is higher-risk cyclical names. One position Nikols has added is DS Smith, a packaging company, which has a 1.5% weighting in the portfolio.

He says: “It’s a bigger company and so we can take a bigger position. They have just done an acquisition. On a three-year view, I expect to see significant earnings growth.”

Nikols says he expects to continue to add companies lower down the market cap spectrum, as concerns, including the eurozone and the threat of a double-dip in America, seem to be diminishing.

He adds: “LTRO [long term refinancing operation] has been particularly significant, as even if Greece goes bankrupt, it does not pose the systemic threat that it did six months ago.”

Nikols says that he does not expect companies’ earnings to disappoint this year, markets will rise and small companies are positioned to do well in this environment.