Nimmo warns against Brexit ‘obsession’ as investment trust outperforms

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Aberdeen Standard Investments fund manager Harry Nimmo has warned investors against becoming obsessed with Brexit as his UK smaller companies investment trust delivers share price returns of 38.9 per cent.

Since the UK’s vote to leave the European Union, Nimmo has slanted the portfolio “significantly” towards companies with international operations with 55 per cent of profits derived from outside the UK compared to 45 per cent in the benchmark Numis Smaller Companies ex Investment Companies Index.

NAV over the full year rose 35 per cent compared to 29.1 per cent in the index. The FTSE 100 returned 16.9 per cent over the same period.

“If the last year is anything to go by the last thing one should do is obsess about the macro scenarios,” Nimmo says in the investment manager’s report for the fund’s full-year results.

Nimmo says there is no way of predicting the turn of events regarding Brexit, but says the “oscillation in views on the outcome will become increasingly fraught” between now and October 2018.

He also criticises the Bank of England’s “unnecessary” rates cut to 0.25 per cent.

“Investors should not become obsessed with Brexit, because in the long run, stock selection is more important than market timing, and investors and fund managers should focus on the long-term investment horizon.”

Nimmo says investors should be holding companies for five to six years “at the very least” and notes the average holding period of the investment trust’s top 10 holdings is four years and four months.

The fund’s investment process focuses on quality, growth and business momentum, Nimmo says. “This should mean that our companies should be more resilient in poor market conditions related to an economic downturn in the UK.”

Fevertree Drinks, SME telecoms provider Gamma Communications and big data business First Derivatives were among the largest contributors to performance over the year, while healthcare accounted for four of the 10 largest holdings. It also has three veterinary companies.

AIM market has ‘come of age’

Nimmo has praised the FTSE AIM market as the SLI UK Smaller Companies board supports an allocation of up to 50 per cent of the investment trust to the small cap index.

The AIM returned 38.5 per cent over the year compared with 29.1 per cent for the Numis Smaller Companies ex Investment Companies index.

“This ‘junior’ market in my view has finally come of age as a dynamic and successful venue for investing in growing smaller companies,” Nimmo says. “Far more proper businesses, making money, paying dividends are in evidence.”

Forty four per cent of AIM is made up of IT, support services, retailing, media and healthcare, Nimmo reports, with the “vast majority of them making profits and paying dividends, unlike during the techbubble era”.

However, total income for the year was down 2.6 per cent to £5.7m compared to £5.9m in 2016 with the value of special dividends falling 50 per cent over the period a large contributor.

Nimmo adds that there has been a shift of assets from more mature and higher yielding assets into a new wave of British smaller companies that he expects to be “tomorrow’s larger companies”.

“This has meant slower dividend growth in the short term but I anticipate that these companies will deliver improved capital and dividend growth in the future. It’s the natural scheme of things in smaller companies.”

The fund sold Rightmove over the period as it became to large for the fund as well as London property specialist Shaftesbury and safety electronics company Halma.