Nimmo defends fund’s market cap composition after downgrade

Nimmo defends fund’s market cap composition after downgrade

Small-cap veteran Harry Nimmo has hit back at Morningstar’s claims his fund “has become a mid-cap as much as a small-cap offering”.

In a recent analyst report, Morningstar downgraded Mr Nimmo’s £1.2bn Standard Life Investments UK Smaller Companies fund from gold to silver.

The ratings agency said in spite of “the many positives” that supported Mr Nimmo’s vehicle, it was worried “the market-cap composition of the portfolio has changed over time so that fund has become a mid-cap as much as a small-cap offering”.

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Morningstar analyst Daniel Vaughan said in the report: “The portfolio average market cap has risen more than the category average to be among the highest in the peer group.”

At the end of June the fund had 57.5 per cent in FTSE 250-listed companies.

However, Mr Nimmo disputed the suggestion he had stretched the terms of his mandate, and said that 85 per cent of his fund’s holdings fell within the market-cap limits of a small-cap index.

“We do like to run our winners and sometimes they grow out of our index,” he said.

“At the end of July our average weighted market cap was £1.05bn, while the Numis Smaller Companies index had a weighted market cap of £880m. That isn’t a significant difference.”

Morningstar said another reason for the downgrade was the fund’s less-than-compelling returns in the past five years, where it had underperformed its peer group.

The portfolio returned 97.2 per cent in the five years to August 27 2015, while the IA UK Smaller Companies sector returned an average 108.9 per cent, data from FE Analytics shows.

However, Mr Nimmo believes his fund could be set to prosper amid growing signs that the UK equity market is now on a shakier footing.

He said: “The fund’s best years were in 2007 and 2008 when there were proper bear markets, where things had fallen by 30 per cent or more.”

Mr Nimmo pointed to the market declines at the end of August and said that his fund, while not immune, had benefitted from his strong preference for UK-oriented businesses.

He added: “Looking beyond the falls at the end of August, I don’t think before this summer I had seen a period where so many of our holdings had traded well.

“The results for many companies were so good that analysts were obliged to raise their forecasts.”

A poor 2014 for the portfolio resulted in it shedding 8.5 per cent compared with the 1.7 per cent average fall for its peer group, but the fund returned 17 per cent in the first eight months of 2015 against the sector average of 11 per cent.

The fund has also benefited from the merger announced by two online gambling companies, Paddy Power and Betfair.

Mr Nimmo holds Paddy Power, whose share price surged 18.5 per cent on the day of the announcement.

Elsewhere, the manager has dumped Isle of Man-based online company Optimal Payments from his portfolio.