Should investors stick with Nimmo’s SLI small-cap fund?

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Investors should not dismiss the £1.16bn Standard Life UK Smaller Companies fund as long as manager Harry Nimmo “sticks to his guns”, despite recent poor performance and a downgrade by Morningstar.

The fund was downgraded by Morningstar last week from gold to silver amid concerns about fees and performance.

After a hike of 10 basis points in the annual management charge in 2011, the fund’s ongoing charge increased to 1.69 per cent, which is above the UK small-cap equity Morningstar category median of 1.54 per cent. This made Nimmo’s fund among the most expensive in the peer group.

The fund has also underperformed over three and five years, delivering 60.8 per cent over three years to the end of June, compared to 69.9 per cent for the UK smaller companies average. Over five years the fund has returned 103.92 per cent compared to 111.32 per cent for the sector.

City Financial investment director Peter Toogood says he’s “very relaxed” about the fund as it remains on City Financial’s panel.

He adds: “It is the same investment process which has delivered for investors over many years. A growth investment style in a QE world has been a challenge in the last five years but the life support to economic growth from QE has passed its best.”

In fact, as Lipper head of UK and Ireland research Jake Moeller argues, Harry Nimmo has “a lot of mid-caps in his portfolio” which driven the fund’s poor performance. Mid-caps have experienced a sharp sell-off in the past months, although “they will come good again”, Moeller says.

He says: “You choose an active fund manager and presumably you understand his process. Than when they have a bad run you want to stick with them because fund managers who are underperforming come good.”

Nimmo is not alone, however. Other funds following the same strategy in the sector have performed poorly and then subsequently recovered. These include the Schroder UK Mid Cap fund, managed by Andrew Brough, which had “a bad trot” for a while but then “bounced back very strong last year”, Moeller says,

However, other experts question whether the size of Nimmo’s fund is a barrier to his future performance.

Tilney Bestinvest managing director Jason Hollands says though Nimmo’s fund has performed well in the past, “it is definitely important to monitor capacity very closely in small-cap funds”.

He says: “While we hold Harry in high regard for his long-term track record, this fund is now way too big. Indeed, most of the fund is invested in mid-caps, at 57.5 per cent, not smaller companies.

“When I hold a smaller companies fund, I want it to be invested in what it says on the tin so we have been adding smaller, more flexible small-cap funds to our universe.”

Chelsea Financial Services managing director Darius McDermott says Nimmo has a very strong reputation and although he has followed him for a number of years, he has never favoured the manager.

FundCalibre, Chelsea Financial Services’ rating business, doesn’t rate the Standard Life fund as it is “too big” and has had too many periods of outperformance and underperformance.

McDermott thinks that within the 40 or 50 funds in the smaller companies sector he can find better.

In particular, he suggests the Marlborough UK Micro Cap Growth, Marlborough Special Situations or Liontrust Smaller Companies funds as alternatives.

McDermott adds: “An up-and-coming small companies fund, which is probably yet to be rated by anyone, is Axa Framlington UK Smaller Companies fund, which is managed by Henry Lowson. We think this fund is generally kept under people’s radar.

“Henry is still a reasonably young manager and had that fund for just three years, but we went to see him earlier in the year, he’s learned his trade alongside Nigel Thomas on the Axa Framlington UK desk and he’s a very strong contender of both an elite rating and for inclusion in Chelsea’s core buy list going forward.”

However, Moeller defends Nimmo’s “courage under fire” saying that if he “sticks to his guns he will come good again”.

He adds: “If he starts changing his process or changing his style than that will be a notion of no confidence.

“The worst thing you could do is to sell the fund while it is suffering with underperformance. I think you’ve got to hold your nerve.”

Despite the recent underperformance, Nimmo’s fund has returned 270.86 per cent over 10 years, compared to 151.23 per cent for the sector.

Moeller adds: “His fund has been performing exceptionally well historically, and if you have come to the Harry Nimmo party late, that’s more your bad luck.”