Standard Life's Nimmo: High Risk Does Not Equal High Returns

Top-rated smaller companies investor Harry Nimmo explains how he favours high quality, low risk businesses, avoiding energy and mining companies

Emma Wall 26 September, 2016 | 3:40PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Harry Nimmo, Manager of the Standard Life Investments UK Smaller Companies Fund.

Hi, Harry.

Harry Nimmo: Hello.

Wall: So, having a look at your fund, last year you did incredibly well, up nearly 30%. This year has been a bit more muted. How much of that is down to Brexit?

Nimmo: Brexit, I would say, on balance, we have more U.K.-orientated businesses than overseas-orientated businesses and it's really the currency issue that has changed perception. So being slightly overweight in these sectors has meant bad news for us in terms of relatively poorer performance. The other point is that we've been light in oil and gas and mining stocks and that has been negative. So the good things last year have now become negatives, but only modestly.

Wall: And you do have a bias towards quality companies which is why you don't see those energy stocks and those miners come out so much. Is that something that when you look at the market now you think, oh, I wish actually our screen was different or do you think everything will out in the end?

Nimmo: No. What's very important in our approach to investing in smaller companies, we invest in lower-risk smaller companies. We find that actually the connection between risk and reward isn't there. High risk does not equal high reward. In fact, quite the opposite. It's very difficult to turn very speculative companies into proper businesses who have revenues, profits and dividends and in the mining and oil and gas space these are one shot companies that are above-average risk.

Wall: And you find it difficult – you have been talking about this earlier – to track those revenues because a lot of them are coming from projects where the figures aren't there yet?

Nimmo: Absolutely. Often it's just a bit of acreage. It's about one project. It's not a spread of projects and it's about individual exploration work that is going to be done and only will deliver profits maybe five years in the future and that's assuming that they do actually discover oil or gas or gold or copper.

Wall: And what this screen is showing a bias towards, however, is tech stocks. You've got a lot of tech stocks in the fund. Also consumer cyclicals. I mean, what does that actually mean? I think people look at that grouping and it can be quite diverse bunch, can't it?

Nimmo: These are growing businesses and you might have in the past always associated technology with high risk. It's not the case so much these days. A lot of these are actually software companies and they have rental models software-as-a-service.

So they have long-term contracts with their clients over five years. So they can see that revenue growth and visibility right into the future. That marks them out as the type of stock that we wish to get involved with. They are growth businesses. They are generally not exposed to the economic cycle and that's quite useful in the current environment where growth is quite low.

Wall: Harry, thank you very much.

Nimmo: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
ASI UK Smaller Companies R Acc1,107.00 GBP-0.18Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar