Standard Life UK Smaller Companies 19 February 2020
Disclaimer
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
Standard Life UK Smaller Companies offers investors an actively managed, concentrated portfolio of high-quality growth stocks, with the aim of delivering long-term capital growth.
The manager, Harry Nimmo, looks to achieve this goal through a combination of quantitative and qualitative research; incorporating a proprietary scoring system called ‘the matrix’. The matrix assesses numerous metrics, narrowing down the number of companies which Harry will meet and enabling him to interrogate management and investigate the strength of the company’s business model. The end-result of Harry’s efforts is a portfolio of between 50 and 60 stocks, currently 54. The trust has a bias towards the upper end of the small-to-medium market cap range of companies, principally due to Harry’s preference for well established companies and his propensity to run his winners.
Over the long run, Harry’s track record is excellent. The past ten years has seen SLS outperform the benchmark in eight, including in both rising and falling markets. This strong performance has continued into recent times, and over the past 12 months the trust’s NAV has comfortably outperformed the sector and index. Over this period SLS also saw considerable levels of volatility, however; H219 was the strongest six months in NAV total return terms since the manager was appointed in 2003, while H119 was the worst since 2008.
SLS has seen a complete turnaround in sentiment over the past six months. Starting Q3 of 2019 on a discount of nearly 10%, the trust narrowed relentlessly to a premium by the year-end. This has since slipped and currently the trust is trading on a discount of 5.2%.
SLS has an exceptional track record of delivering returns for investors. Harry’s unique, quant-based approach to investing means that he is able to remain objective, without biases or external influences impacting his investment decisions too much. This, coupled with the trust's concentrated nature, makes for a unique portfolio with the potential for strong and differentiated returns compared to that of the benchmark and peers.
Although Harry has a strong track record, investors should recognise that in the short term SLS can be a white-knuckle ride at times. This was seen in 2019 when SLS outperformed in all but one peer in the 25-strong AIC sector, but this was achieved with high levels of volatility. This result reflects characteristics one might expect from a manager who holds a concentrated portfolio and is willing to back his bets with conviction.
The trust's outperformance, coupled with an already wide discount, helped SLS come back into favour, and the discount narrowed significantly in the latter half of 2019. In 2020 the discount has started to widen in absolute terms and relative to the peer group.
bull | bear |
Highly experienced manager with a long-term track record of outperformance | Concentrated approach increases the volatility of the trust |
A unique combining strong quant screening coupled with a highly experienced manager | The charges are above average in the peer group |
Slipped to a discount in recent times despite strong performance and improved sentiment towards the sector |