Fund of the Fortnight: Standard Life European Smaller Companies
For a fund analyst the Holy Grail is finding an experienced manager who is at the peak of their career, with a very good, meaningful, track record managing a low level of assets. This combination means that you have a manager with the experience of having been through at least one economic cycle, with the desire and drive to continue to develop their careers, whilst at the same time having the flexibility to implement investment decisions quickly. The importance of this last factor is not to be underestimated.
Standard Life European Smaller Companies’ manager Ken Nicholson has the above credentials. Nicholson joined the smaller company’s team at in 2000 and initially worked as an analyst on Standard Life’s UK Smaller Companies fund under the highly regarded Harry Nimmo.
In 2007, Standard Life launched a European Smaller Companies specifically for Nicholson. For historical reasons the fund has largely only been available in Continental Europe, where Standard Life’s footprint is currently far less prominent. As a result the fund has so far struggled to raise assets.
The fund invests in developed European companies including the UK. Performance to date has been impressive, indeed each year since the launch of the fund the manager has beaten the index. Over the entire period the fund has returned 95.95% versus the index return of 44.37% (21/11/13).
Nicholson scours developed Europe to look for companies which are able to grow their earnings organically at a faster level than that of the underlying economy. He takes an active approach to meeting management, visiting company premises in assessing businesses: in other words, good old-fashioned stock picking. Nicholson also makes allowances for the underlying trends in the stock market, a more difficult skill than might at first seem apparent.
Markets move in cycles and tend to put premiums on different types of businesses. Do you want balance sheet leverage to gear you to the underlying economy? Do you want balance sheet strength and robust earnings to protect you from exogenous uncertainties? So far in his investment career Nicholson has navigated these minefields. More importantly, he has been selective about when to change the underlying focus of his portfolio; making significant changes to a portfolio and getting it wrong is often the easiest and quickest way for investors to lose money – as money fund managers have found to their detriment in recent years.
A good example of this has been in the last 12 months. European equities have generally been unloved since the financial crisis and where investors have had exposure to the continent they have generally preferred those businesses with resilient earnings, especially those from overseas.
Towards the end of 2012 Nicholson believed that the premium being paid for these companies, versus the more cyclically exposed domestic companies, was extreme. He adjusted the portfolio accordingly and the fund has been position ideally for the rally in European equities this year. In 2013 so far the fund has returned 38.42% versus the index 31.31% (21/11/13).
Investors should not expect such perform to be repeated annually. Nevertheless it demonstrates the value that can be added by identifying and paying for a manager with the skill and capacity to consistently produce returns in excess of the benchmark.
Mark Lane is a senior research analyst at Bestinvest