Hello and welcome to Morningstar. I'm Emma Wall and here with me today is Dan Nickols,
Manager of the Old Mutual UK Smaller Companies Fund. Hello Dan.
Hi.
So, we're here today to talk about smaller companies. You've run the fund for 10 years
but being involved with it for about 15. Over that time what has changed as a smaller companies'
investor?
In some ways, very little. I say that because it's always been the universe where there
have been a lot of stocks to look at. The stocks themselves might have changed considerably
over that time. You've had companies come in via IPO, companies be promoted out of their
index, companies be subject to M&A, so, say, the actual index composition has changed very
radically over time, but actually new companies have come in to backfill. So, the task of
shifting through relatively poorly understood companies, remains essentially the same.
While the challenge is different though, because one would imagine with the internet, with
sort of greater transparency these companies are more savvy that there is less that sort
of corporate governance concerns that you might have had in the past?
To a point, although – yeah, clearly, the whole corporate governance movement is clearly
penetrating to an extent into the smaller-cap universe. But at the same time be surprise
that how sort of the bottom sort of floor one is as an investor with some of these businesses.
They are not necessarily large enterprises and they depend for their success and failure
on the skills acumen and they are relatively small sort of group of people. So, yeah, I
mean, you're not dealing – in some cases you are dealing with well-established businesses,
but in others, you are dealing with essentially quite new concepts.
And the companies themselves because of the way that they sort of distribute, in the way
that the revenues come in, have you had to had a greater understanding of international
themes as a small-cap investor now than you may have done sort of 10 years ago?
Again, I think again that's probably true to a point. I mean, I think in tandem with
economies generally what you're seeing in the U.K., even in the U.K. small-cap arena,
is a creeping sense of globalisation. So, clearly, we have to do our best to understand
what that means and I suspect that's the phenomenon that's going to only sort of grow over time.
As we sort of sit here now, my general guess and that something like 30% of our universe
is actually internationally driven.
Then looking at the challenges today because that does bring a fresh set of challenges,
I know you blend top-down with bottom-up. What are the things that you're concerned
about as a small-cap manager for 2015 and beyond?
Again, I mean, I suppose the concerns are in the sense are quite generic, in the sense
that we face them one way sort of year-in and year-out, but I suppose particularly in
this post-credit crunch era it's the growth outlook and right now we have a global growth
environment which is extremely unbalanced. Some economy is doing quite well, the U.S.,
the U.K. doing pretty well, but the Eurozone still struggling and even hitherto high-growth
economies like China seemingly sort of seeing slowing rates of growth. So, that clearly
is a concern. And other issues that we have to try and get our heads around are the time
of interest rate rises in some of those faster-growing economies offset by loosening elsewhere and
what all of that means. What all of that means for risk appetite as much than anything else?
It's all very well picking what you think of good stocks, but if you are in the wrong
sort of air in terms of too much economic sensitivity or too much defensiveness at the
wrong points in time that can have a significant effect on your performance. So, it's getting
those sorts of balances right too.
Smaller companies, are they more sensitive to those sorts of things because they don't
have the sort of clout that larger companies do to weather a storm, things like the upcoming
election, for example, and the volatility that may come along with that?
I think there are two separate of issues to try and sort of tease apart. The first is
sentiment generally and clearly, smaller companies I think can be volatile in terms of the way
that they perform as shares and clearly, they can underperform for a period as a result.
But I think actually one of the real assets of operating in this space is that you can
find unique businesses that can actually do very well, almost irrespective of the wider
economic environment. So, again, one of our tasks is to find enough of those to see ourselves
through those periods of volatility. It could put ourselves in a position where we can actually
say, look, we're comfortable with what these companies are actually going to do, because
we understand what the drivers are and yes, well, it might be uncomfortable in the short
term watching what their share prices do, let's view any weakness as an opportunity
just to buy more rather than actually panic.
Dan, thank you very much.
Thank you.
This is Emma Wall for Morningstar. Thank you for watching.