Fund Review: Old Mutual UK Smaller Companies

Trying to avoid pigeonholing itself in a particular box, the £777.7m Old Mutual UK Smaller Companies fund utilises a combination of top-down and bottom-up analysis to construct its portfolio.

Launched in February 2001, the fund aims for capital growth through a portfolio of UK smaller companies, although the manager notes it also aims to produce top-quartile performance against its IMA UK Smaller Companies sector peer group on a rolling 12-month basis.

Manager Dan Nickols, who has run the fund since 2004, explains: “The way we attempt to do that is combine top-down and bottom-up analysis. Our view is if, for example, you were to pigeonhole yourself as a growth investor or value investor, you would by definition underperform when the conditions don’t suit that particular style of investing.

Article continues after advert

“We try and flex the overall positioning of the fund to cope with changes in the business cycle and market conditions.”

Therefore macro factors can influence the portfolio, with the manager noting: “When we see evidence of likely acceleration in economies, typically we would try and reflect that by moving the portfolio on to a more cyclical footing. Conversely, in a period of slowdown, the bias would expect to move towards more defensive, more predictable types of earning streams.”

Since the financial crisis, he describes changes to the portfolio more as an evolution dating back to the start of the bull market in 2009.

“We’ve had in that post-crisis period a difficult environment to contend with. On the one hand, you’ve had economic growth but interspersed with significant periods of risk aversion. What we’ve attempted to do is almost take a barbell approach, and say we want to have a core of more predictable self-standing growth-orientated businesses that have structural growth characteristics.

“At the same time, we did want to have an element of cyclicality in portfolios, reflecting the fact that underlying the ebb and flow of risk appetite economies were nonetheless improving. So we wanted an element of economic sensitivity reflected in the portfolio.”

He adds that as issues such as the doubts over the survival of the euro, US economic growth and the sustainability of China are resolved, it “makes sense to tilt the needle towards cyclicality and cheapness and sell down some of our more expensive structural growth holdings just to try and orientate the portfolio and optimise the benefits to be gained from a recovering economy and recovering risk appetite”.

The performance of the fund is pretty consistent, outperforming both the IMA UK Smaller Companies sector and the Numis NSCI Ex Investment Companies index across one-, three- and 10-year periods to January 22 2014, but lagging behind the benchmark on a five-year view with a return of 213.45 per cent.

In 2013, the fund returned 38.17 per cent compared with the sector average of 37.18 per cent and the benchmark return of 36.93 per cent, although within the sector it sat pretty much right in the middle, according to data from FE Analytics.