What has gone wrong for SLI’s Nimmo?

Standard Life’s Harry Nimmo is not the first successful manager to hit a patch of poor performance and end up on Bestinvest’s Spot the Dog fund list. His UK Smaller Companies Oeic fund may  be bottom in its sector over one year, but he still sets store by retailers
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How quickly you can go from hero to zero in this business. Just nine months ago a magazine described Harry Nimmo of Standard Life as the most successful fund manager of the decade, his Smaller Companies trust beating all comers. Then last month he was lambasted as the biggest new arrival in the annual Spot the Dog list of funds to avoid, compiled by Bestinvest

At least Tom Dobell at M&G must be relieved that the heat is on someone else.

Jason Hollands at Bestinvest says: “Perhaps the biggest surprise is the appearance in the list of Harry Nimmo’s Standard Life UK Smaller Companies fund,” particularly when it has been such a favourite among financial advisers.

The numbers on Nimmo’s fund are, to put it bluntly, dismal. For the past year the Oeic fund (there is an investment trust version too) is ranked 53 out of 53 in the IMA UK Smaller Companies sector. Over three years it is 49th out of 52. It has managed a gain of just 1.7 per cent over the past 12 months compared with the 15.6 per cent enjoyed by the peer group.

So what has gone wrong? It is not Asos, the online retailer which for so long was partly behind Nimmo’s success, and where at one point he owned more than a tenth of the company’s shares. At the start of this year it was still the second-biggest holding in the £1.25bn fund and was trading at about £70 a share. Now it has plummeted to below £28.

But Nimmo says he started buying at just 80-85p a share shortly after its flotation in 2001 and had sold out completely by June this year, offloading £50m of stock at an average price of £46. So it still ranks as one of the best investments of his career.

It is the other stocks in the top 10 that have also taken a hammering and left his portfolio looking so dispirited. His biggest holding, Telecom Plus, is down from £18 at the start of the year to £14. Rightmove has slumped from £28 to £22. Supergroup is down from £17 to £11 since March, while Ted Baker has dropped from £23 to £17 since April.

Hollands is being kind when he says Nimmo’s style is currently “out of favour”. Harsher critics might call this portfolio Nobby No Mates.

A major reason it sits at the bottom of its sector is that it is, arguably, not a smaller companies fund but a mid-cap fund, with 58.6 per cent of the fund invested in mid-caps and 3.5 per in FTSE 100 companies, meaning smaller companies represent less than 40 per cent of the portfolio.

Old Mutual UK Midcap has also struggled badly over the past year, ranked 241 out of 270 funds in the IMA All Companies sector. Although if Nimmo’s fund was in this sector, it would still rank 254th.

After 17 years at the helm, Nimmo is not about to throw in the towel. He blames the “knee-jerk reaction” of investors, particularly retailers, who bailed out of mid-caps in the spring when US Federal Reserve chair Janet Yellen signalled the end of quantitative easing.

Retailers and housebuilders plummeted, but curiously the micro caps held up. Smaller company funds such as Miton, run by Gervais Williams, have powered ahead (up 48 per cent over the past year) but in reality they are fishing in a very different pond to Nimmo.

All of the top-performing small company funds are micro cap funds. What’s more, Nimmo reckons the mid-cap stocks have been beaten up way too much by the market, falling on sentiment rather than the facts of their underlying performance.

“More of the fund’s top 10 have been seeing earnings upgrades than downgrades,” he says. “What we have seen in the past three months is just noise. There have been some really quite bizarre price moves.”

He adds that the fund’s focus on growth, quality and momentum translates into a dividend yield that is more secure and reliable than others in the market. “The fund’s dividend yield is not much lower than the market but is more assured,” he says.

One reason it became more of a mid-cap fund was that Nimmo runs his winners. After buying Asos at under £1, he held on despite huge increases in the share price, and although he did not get out at the very top, investors still gained phenomenally.

Telecom Plus and Rightmove may have fallen in recent months but he reckons investors who hold on will prosper, adding: “I’m still very comfortable with the retailers and there are signs that a dose of reality is coming back to the market.”

However, as well as selling Asos he has also sold Ocado, which has seen its price plummet from above 600p in late February to below 350p. The cash has been recycled into, among others, Poundland, Hilton Foods and storage company Big Yellow.

The fund was soft closed back in August 2011 but has since reopened its doors. Hollands says one of his “nagging concerns” is the team might be getting a little stretched, not just by the size of assets under management but also because the range of mandates was extended two years ago to incorporate a global small-cap fund.

Nimmo is the first to acknowledge that the extraordinary returns on the fund until last year will not be repeated – it was making 22 per cent a year for five years before the recent falls and that was partly because the market was coming up from being deeply oversold in 2009. But he believes future gains of 10 per cent a year are entirely plausible.

Every fund manager goes through patches of poor, even dreadful, performance. Woodford has been there, Dobell is still there. The question now is how long Nimmo will be there.

Collinson

Harry Nimmo, head of smaller companies, Standard Life Investments

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Harry Nimmo joined Standard Life as an analyst in 1985. In 1993 he was appointed head of smaller companies and in 1997 the UK Smaller Companies fund was launched with himself at the helm. In 2003 he took over the Smaller Companies investment trust and earlier this year he was named fund manager of the decade at the Grant Thornton Quoted Company Awards.