Regular readers of this column will know I have highlighted the stockpicking skills of Standard Life UK smaller companies fund manager Harry Nimmo on a number of occasions. I remain a great fan of Harry for exposure to the UK but I have recently discovered the talents of another fund manager that sits right next to him in Standard Life’s Edinburgh offices. Just over three years ago, Ken Nich-olson launched Standard’s European smaller companies fund. Although it has only been going a relatively short time, I believe it is worth a closer look, even though Standard has done relatively little to draw attention to the fund. That is likely to change but for now it remains small at around £70m in size.
Slightly unusually, this is a pan-European fund, meaning it invests in the UK as well as in continental Europe. Historically, pan- European funds have not been terribly successful in capturing investors’ attention as people tend to consider the UK and Europe as two entirely separate investment universes, buying UK funds for UK exposure and European funds for exposure to companies there. Thus, many pan-Euro-pean funds have been ignored.
Yet it would be wrong to dismiss a fund on this basis, especially one that has performed extremely well. Indeed, Standard Life European smaller companies has kept up with Harry Nimmo’s flagship fund since its launch, albeit with the tailwind of a weakening pound against the euro, something that adds an extra dimension of risk to the fund for UK investors.
Presently, the fund has around 30 per cent in the UK, roughly in line with the benchmark, and large weightings in Germany and Switzerland. Nicholson, who has been with Standard Life for over 12 years, is quick to point out that European smaller companies are even more under-researched than UK ones, allowing a hard-working fund manager huge scope to uncover good value shares and outperform, espec-ially given a concentrated, unconstrained approach such as his. To date, outperform is exactly what he has done, successfully whittling down over 1,000 companies across 16 countries to just 40 to 50 high-conviction stocks for his portfolio.
Like most Standard Life fund managers, Nicholson has the assistance of an in-house screening tool called the Matrix. This looks at data on all the stocks in the universe and highlights those with strong upward momentum to their earnings revisions, cheap valuations and where comp-any directors are buying stock.
This helps flag up some ideas for Nicholson to research in greater depth although in relation to director buying, Nicholson finds it is a less valuable indicator on the continent than in the UK. As well as attending around 250 company meetings a year, he speaks to local brokers who are his ears and eyes on the ground.
With such a vast area to cover, he feels this network of contacts really helps to add value to the fund.
One of the things I like about Standard’s approach to UK smaller companies is the consistency it has had over the years in an area that can be extremely volatile.
It looks like Nicholson is repeating this in the field of European smaller comp-anies, a similarly volatile area plagued by fund manager inconsistency. If this continues to be the case, I would suggest that investors ignore the pan- European label and consider investing in the fund.
With such a small and nimble vehicle, Nicholson has the chance to prove his quality and with an excellent team around him, I think he has every chance of doing so. While small companies in Europe are more expen-sively rated than their blue-chip equivalents, with so many stocks to choose from, there will always forgotten gems to be discovered. Similarly, this fund has been hidden away but I for one will be following it closely now I have uncovered it.
Mark Dampier is head of research at Hargreaves Lansdown