Mark Dampier: A three step plan for investing in smaller companies

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It is always good to see new blood coming up through the ranks, especially from an investment house that prides itself in having some of the best names in the industry. Manager of the Jupiter Smaller Companies fund James Zimmerman is a relatively new name to fund management, beginning his career five years ago as an equity analyst for the group’s UK income team. This role immersed him in Jupiter’s culture and gave him the opportunity to shadow highly experienced and well regarded managers such as Tony Nutt and Alastair Gunn.

In 2013 Zimmerman found himself in New York as a global analyst for Rockefeller & Co. This was markedly different from his role at Jupiter as he was required to scrutinise companies in far greater detail and pitch potential investment opportunities to fund managers. But his time overseas was relatively short lived, as Jupiter invited him back to manage the UK Smaller Companies fund in June 2015.

It is important for any manager, especially a new one, to feel comfortable enough with their process to shrug off their predecessor and shape a portfolio according to their own style. Zimmerman has had no problems in this area: his first change was to reduce the portfolio he inherited to around 50 holdings, retaining only 15 of the original 130 stocks.

I believe the best investment strategies are often those you could clearly articulate to your grandmother in a few sentences. Zimmerman’s approach fits that bill. Firstly, he likes to invest in companies where management has meaningful ownership – 5 per cent or more of the business across senior managers and directors, or a chief executive with more than 3 per cent ownership. It is not an exact science but Zimmerman feels ownership creates a strong alignment between those that run the business and its shareholders.

Second, he feels it is vital he understands every aspect of a company. This allows him to recognise whether a share price collapse of 40 per cent, for example, is an opportunity or a disaster. This is a test I run with my own research team. To back a fund manager, our conviction in them must be high enough to view any fall in price as a buying opportunity.

Finally, Zimmerman avoids companies with high levels of debt. He estimates fewer than 200 companies in his smaller company universe meet all three of these criteria.

One of his largest holdings is Fever-Tree drinks. The premium mixer company is well known to many of us for its tonic water, which has swept the country by storm. It has performed exceptionally well and Zimmerman has trimmed the position a number of times to prevent it forming more than 10 per cent of the total portfolio (which is against Ucit rules). He believes the company has plenty of growth left in it: for example, it has just ventured overseas to offer its products in the US.

Another of his favourite companies is Trupanion, the US market leader in medical insurance for cats and dogs. The company owns genuine disruptive technology, which is not easily copied, and Zimmerman expects it to grow its revenue by 20 per cent to 30 per cent per annum for years to come.

Good performance from companies such as these has aided the fund in its 13 per cent growth since Zimmerman began his tenure. This places it seventh among its peers, where the average return was 5.5 per cent over the same period. And despite getting off to a great start, Zimmerman’s feet are firmly on the ground. He clearly loves what he does and if he can keep on the straight and narrow, as I think he will, he could become one of the leading managers of tomorrow.

Mark Dampier is head of research at Hargreaves Lansdown