Mark Dampier: Playing the UK smaller companies revival

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Old Mutual is home to one of the most successful UK equity teams. For more than a decade it has been a key contender within the UK small and medium-sized companies arena but with the appointment of Simon Murphy in 2008 and, more recently, Richard Buxton it now has considerable strength within larger companies too.

We identified its potential many years ago. Our multi-manager team first invested with Old Mutual’s UK smaller companies team in 2001 and investors have been richly rewarded since.

Investing over this period has required patience. Given the magnitude of the financial crisis in 2008, the most comfortable option for many investors was to sell everything.

However, unless investments were sold at the top of the market prior to its crash and repurchased at the bottom (which, in reality, even experts find near impossible), this would have proven a costly mistake. The Old Mutual UK Smaller Companies fund lost 45 per cent but investors who held on have been well compensated. It has since grown 271.6 per cent from its low in October 2008.

Stockmarket volatility during the crisis led the fund’s manager Dan Nickols to increase exposure to larger offerings within the smaller company universe. More recently, he has been diversifying back into the lower end of the market as he feels valuations are more attractive. I view this positively as this is where his stockp0icking has historically been finest.

Nickols invests within three broad themes: structural growth, special situations and economic sensitivity. The former includes supplier of mixer drinks, Fever Tree. The company has gained significant market share from others in the industry and has established itself as the only premium mixer provider.

The stock has risen 85 per cent since it listed on the market in November, aided by a growing number of premium gin brands in the UK and the rising popularity of the Moscow Mule cocktail in the US.

Special situations include veterinary service provider CVS. The company is consolidating a fragmented sector through the acquisition of smaller veterinary practices. This approach to growth has worked successfully for similar businesses in the past.

For example, funeral services provider, Dignity, which has previously been held in the fund, grew considerably through the acquisition of small, family-run funeral parlors.

Finally, Nickols invests in more economically-sensitive businesses. The collapse in the oil price has contributed to falling inflation which, when coupled with rising wages, means the average UK household has benefited from a 9 per cent increase in disposable income over the past year.

The manager expects companies operating within the consumer services sector to profit and investments in this area include house builder Crest Nicholson and car retailer Lookers.

The total number of new companies listing on the UK stock market has grown from 81 in 2013 to 106 over the past year. Nickols feels he is able to add considerable value through stock selection in this area and so is encouraged by the increasing number of opportunities this presents.

His involvement in initial public offerings has historically been positive for the fund. He has invested in 27 new smaller companies listings since 2013 and, on average, his selections have outperformed the Numis Smaller Companies (-Inv Trust) index by 20.6 per cent over this time.

Smaller companies suffered a hangover in 2014, following stellar performance in 2012 and 2013, but have performed well so far this year. There are always risks posed by the wider economic environment; however, with a more stable UK political scene, I feel UK smaller companies could enjoy something of a revival.

With one of the best UK teams at its helm, the Old Mutual UK Smaller Companies fund remains one of my favoured options to harness this potential.

Mark Dampier is head of research at Hargreaves Lansdown