Standard Life Smallers trust delivers strong returns amid merger talk

The trust, which has been run by Harry Nimmo since 2003, made a net asset value (NAV) total return of 25 per cent in the year to 30 June 2018, comfortably beating the 8.8 per cent rise by the Numis Smaller Companies plus Aim (excluding investment companies) index. Over the same period the trust’s share price rose 18 per cent.

Standard Life UK Smaller Companies' return was driven primarily by individual stocks rather than sector decisions made by Mr Nimmo. Fevertree Drinks (FEVR), healthcare provider NMC Health (NMC) and audio-visual display unit distributor Midwich (MIDW) were singled out as strong performers over the period.

The trust’s long-term performance has also been good during Mr Nimmo’s tenure. Over the past 10 years, the trust’s NAV total return was 361.1 per cent, compared with 147.9 per cent for the Numis Smaller Companies plus Aim Index.

“These are another set of strong results from Standard Life UK Smaller Companies,” analysts at Numis Securities said. “We regard Harry Nimmo highly, and were encouraged by his commitment in 2015 to manage the fund until at least 2022.”

The trust's board said details of the proposed merger would be made clearer in the next few weeks, followed by a general meeting on 3 October. The merger is subject to approval by both sets of shareholders. If it goes ahead it will increase Standard Life UK Smaller Companies' assets under management from around £440m to more than £600m.

As part of the merger discussions, Standard Life UK Smaller Companies’ board has negotiated a lower investment management fee. The trust previously had a tiered fee structure that was charged on assets including the trust's borrowing, known as gearing. It will now charge the fee on net assets, which excludes gearing. It also introduced an additional tier, which should bring costs down further.

Since 1 July 2018 the fee is 0.85 per cent a year on net assets up to £250m, 0.65 per cent up to £550m and 0.55 per cent on anything above. As of 30 June, the trust’s ongoing charge was 1.04 per cent, down from 1.08 per cent in 2017.

Despite the trust's good performance and lower fee, analysts said merger negotiations have widened the trust's discount.

The discount to NAV widened from 6.1 per cent on 21 June – the day before the merger proposal was announced – to 7.2 per cent as at 28 August, according to Winterflood. Charles Cade, head of investment companies research at Numis, said this is likely to be due to worries that there will be an oversupply of stock after the merger.

The combination could result in short-term selling pressure on Dunedin Smaller Companies' shares as there is no cash alternative for its shareholders, who will also be expected to bear the costs of the merger. As at 28 August, Dunedin Smaller Companies was trading at a discount to NAV of 12 per cent, substantially wider than in the immediate aftermath of the merger announcement when its discount tightened to 7.3 per cent.

But Mr Cade added: “We believe there is limited discount risk as Standard Life UK Smaller Companies’ board has a commitment to maintain the discount at less than 8 per cent in normal market conditions.

“The current discount to NAV of Dunedin Smaller Companies appears a little wide, but it is very illiquid, meaning that arbitrageurs are unlikely to try to exploit any value differential.”

Performance