Unearth quality growth with Standard Life UK Smaller Companies

This investment trust aims to achieve long-term capital growth by investing in UK-quoted smaller companies. According to FE Analytics data, over 10 years it has delivered a share price return of 337.7 per cent, more than double the performance of the Numis Smaller Companies excluding Investment Companies Index, which made 153.8 per cent. In addition, the trust has comfortably beaten its benchmark over one, three and five years.

The trust also pays dividends to investors twice a year from the income it receives from its investments. It is currently yielding 1.5 per cent.

The trust is run by highly experienced small-cap investor Harry Nimmo, who has been at the helm since 2003. Mr Nimmo aims to identify quality growth companies with a competitive edge and strong management teams. He uses Standard Life Investment’s quantitative stock selection system, the Matrix, to screen a possible investible universe of around 650 companies that have market capitalisations up to £1.5bn. Factors include earnings growth, share price momentum, valuation and the level of director dealing, with those companies considered a potential buy undergoing further in-depth analysis.

The resulting portfolio consists of around 60 holdings, which are continually assessed to ensure their Matrix scores remain attractive. The manager will sell or reduce a holding if there is deterioration in this score, a doubt about the investment case or if a position grows to be larger than 5 per cent of the portfolio.

Smaller companies make up the bulk of the trust’s portfolio. But the trust is also differentiated from other UK smaller company funds by its substantial position – currently 41.8 per cent – in Alternative Investment Market (Aim) stocks. This market is increasingly where the manager is finding stock opportunities, many of which have an international dimension.  

Recent additions and top-up investments include RWS (RWS), a patent translation business that has a strong foothold in the US and China; the veterinary service provider CVS (CVSG), which is expanding into the Netherlands; Fevertree Drinks (FEVR), the producer and exporter of premium drink mixers; chocolatier and cocoa grower Hotel Chocolat (HOTC); soft drinks company Nichols (NICL), whose lead brand Vimto is a favourite in the Middle East during Ramadan; and Accesso (ACSO), which provides virtual queuing technology and point-of-sale and ticketing software to top attractions around the world.

By contrast, he has recently sold a handful of UK-focused companies, including Dunelm (DNLM), Computacenter (CCC), Secure Trust Bank (STB) and Rightmove (RMV).

The trust is trading on a discount to net asset value (NAV) of 6.2 per cent, which is slightly wider than its 12-month average discount of 5.9 per cent. This derating is part of a trend in the UK smaller companies sector, which has been weighed down by investor fears over the impact the UK’s withdrawal from the European Union will have on its economy. While some domestic-facing smaller companies could be hurt by the ongoing political and economic uncertainty, the fund manager’s strong record of finding quality growth companies suggests his portfolio should prove more resilient than most.

So if you are a higher-risk, long-term investor, Standard Life UK Smaller Companies Trust’s excellent performance, experienced management and Aim stock-picking skill indicates possible high rewards. Buy. EA.

Performance