Investment veteran Harry Nimmo, who runs Standard Life’s £1.3bn UK Smaller Companies fund, said his risk-averse investment strategy caused overall returns to tail-gate the sector average.
Over the past year, the £1.3bn fund has returned 27 per cent, trailing very closely to the IA UK Smaller Companies sector, which has returned 27.3 per cent over the same period, according to figures from FE.
But Mr Nimmo said one year was not long enough to gauge a fund’s performance.
The small cap veteran takes a risk-averse approach to investing, which he said is less important for investors in a bull market, particularly over a short timeframe.
“Over the past five years our returns have been good but they haven’t been spectacular compared to our competitors, and that is because we are quality-orientated.”
Mr Nimmo said many of the weaker companies in the market have not been put under stress by recession for years.
But he claimed the companies in his fund are resilient to difficult market conditions, which he said he proved during the global financial crash of 2008.
While his fund hovered close to the index last year, over a three-year timeframe it scooped up a return of almost 52 per cent, racing ahead of the sector average which returned 38 per cent over the same period.
Mr Nimmo said investors who run funds that closely imitate the index are essentially building in the potential for underperformance because they are effectively buying companies they don’t like.
He stressed that he only buys stocks that he likes, adding: “We have a track record which shows this, and we have a process that has worked through four economic cycles.”
A study from the Financial Conduct Authority published last year criticised fund managers who charge a high price for funds that fail to outperform the benchmark.
Commenting on the study, Mr Nimmo said it was “a bit of a zero-sum game”, adding: “Half of all fund managers will outperform and half will underperform.”
Last year, the chief executive of Neptune Investment Management, Robin Geffen, said investors focused on small and mid-cap companies had been given a “free lunch” since the financial crisis.
However, he said the free lunch was now over, arguing that many fund managers in the smaller cap sector would underperform.
Mr Nimmo admitted that it had been a good few years for small cap investors, but was confident that smaller companies would continue to be more resilient compared to their mega-cap counterparts.
“Over the past 100 years, small companies have grown a lot quicker than the larger ones,” he said, pointing out that small firms are more nimble and able to adapt to changing business circumstances.
He compared the impact of the rise of the internet to a meteorite hitting the earth, which killed off the dinosaurs but left the smaller organisms still standing.
Ben Yearsley, director at Shore Financial Planning, praised the level of outperformance Mr Nimmo has generated over the long term.
However, he questioned whether the size of the fund is going to deliver the "exceptional" long-term performance investors have been used to.
"Looking at the five-year numbers and they start to look average against the benchmark, is that size related or simply a question of tougher market conditions?"
Mr Yearsley pointed out that over five years the SLI vehicle comes 26th out of 48 funds in total, and 24 of the better-performing funds are smaller.
"Having said all that, you don't necessarily need to take the riskiest approach with small cap investments, so maybe mixing this fund with a micro cap fund, for example, would give a mix of quality and performance with lower overall volatility."
katherine.denham@ft.com
