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The feeling’s Mutual

Mark Dampier’s Fund Focus

I wonder whether, like me, you find yourself constantly battling against information overload? The internet in particular has brought a deluge of information, some of which is really valuable but much of it is contradictory. I have found myself reading two intelligent, erudite and convincing arguments on totally opposite points of view in the same sitting.

At times, many people struggle to see the wood for the trees and I include myself in that. That is why I always try to remember that the best use of an investor’s time is to seek out the best fund managers rather than fretting over which market will perform the best. Over the long term, the top managers should see you through.

With more than 2,000 funds available in the UK, you might think that even this approach would not improve an investor’s lot – the array of choice still appears bewildering. Frankly, however, the majority of these are poorly managed and can quickly be discounted. I doubt there are more than a couple of hundred funds that are truly worthy of an investor’s attention. Even among the good ones, a few stand out as being really exceptional and I am looking at one of those today.

The Old Mutual UK select smaller companies fund is run by what is, in my opinion, one of the best invest-ment teams in the country. The lead fund manager is Daniel Nickols.

You would be forgiven for thinking that the last area you would want to invest in a recession is smaller companies. After all, they tend to be particularly sensitive to the economy and are known to be volatile, higher-risk investments. Yet some smaller companies funds have been excellent over the last year and I am not sur- prised to see Old Mutual among them.

In fact, the nature of smaller companies in the UK has changed dramatically over the last 25 years or so. Where once the sector was dominated by engineering firms, particularly those based in the Midlands, now the sector is far more diverse and not all are domestically oriented. Some smaller companies are world leaders in their field and have plenty of overseas income – useful given sterling’s weakness.

What I like about the Old Mutual fund is that it has an extremely pragmatic approach, using a combination of individual stock research and analysis of the wider economy. It has been a successful performer for many years. In the early part of this decade, a focus on the progress of the business cycle helped the managers deliver good returns. In the middle part, when pretty much everything was going up, it was more important to get stockpicking decisions correct and here too they excelled.

The fund has shown that whatever the economy or stockmarket throws at it, it has the capacity to deliver performance superior to its peers. Since its launch in January 2001, it is up by a remarkable 191 per cent compared with a rise of just 19 per cent for its sector average and 16 per cent for the UK stockmarket as a whole.

This is not to say, however, that the Old Mutual team get everything right. Daniel Nickols will admit that the fund was a little left behind in March, April and May when the current rally began. At the time, he was only just starting to shift his portfolio from being relatively defensive to more aggressive so, while the fund did OK during the early stages of the rally, it did not capture the full gain.

The team continues to believe that the more economically sensitive parts of the market will continue to do well in the short term. They are aware, though, that 2010 could be an extremely difficult time – especially after the general election – and that their approach will have to remain flexible.

What is quite surprising, given the quality of fund managers in this sector, is how unfashionable UK smaller companies have been over the years. It is one of those sectors where anomalies abound and gives a quality, hard-working manager such as Daniel Nickols the chance to shine through.

Mark Dampier is head of research at Hargreaves Lansdown

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