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Standard Life UK Smaller Companies beats benchmark by 10%

For the year ended 30 June 2016, Standard Life UK Smaller Companies’ diluted net asset value total return was 4.1%, compared with a total return of -6.6% for its benchmark. The Board is recommending a final dividend of 5.20p per share, an increase on last year’s final dividend of 18.2%. If approved, the final dividend, together with the interim dividend of 1.40p paid in April, will give a total dividend for the year of 6.60p and will represent an increase of 13.8% on last year.

The second half of calendar 2015 was a period of exceptional out-performance for the fund in terms of the net asset value but especially for the share price which rose 27.8% as the benchmark Numis Smaller Companies Index (ex-investment trusts) actually fell by 2.4%. This period of out-performance was magnified by a dramatic narrowing of the discount. By December Standard Life UK Smaller Companies’ shares regained the status of trading at a premium to net asset value albeit for a brief period. The key drivers were the  lack of exposure to Oil & Gas, Mining and Engineering stocks. Helpfully they were also heavily exposed to the UK consumer, through Retailers, Leisure and Media, also growth sectors like Software and Healthcare and UK orientated sectors in general such as Real Estate and Financials.

Bid activity played a part.  A substantial holding in Quintain Estates and Development was acquired by Lone Star of Texas. Furthermore, the PaddyPower/Betfair combination was seen as a very powerful player in the on-line sports betting market going forward. Not owning retailer Darty and electronics distributor Premier Farnell hurt performance in June.

January however brought a change of fortune. What had been good in 2015 became bad in 2016 and vice versa. An extreme underweight position in Resource stocks was very negative. Also of note was that selected Real Estate, Consumer Cyclical and Financial stocks held back performance.  They say that their overweight position in Retailers, albeit high quality growth retailers, held back performance.

The five leading performers in the year were:-

  • Fevertree Drinks, which managed to come out with at least three “profit warnings” where they stated that earnings would be significantly ahead of expectations as they continue to gain share as a result of the premium gin revolution around the world. Consumers have been impressed by the quality and provenance of Fevertree in comparison with erstwhile market leaders Schweppes and Britvic and the shares rose by 153% over the year.
  • Accesso Technologies, the world leader in “queuing technologies” through smart phones for visitor attractions, signed a breakthrough contract with the world’s second biggest theme park operator Merlin. This deal promises to be transformational.  The shares rose by 106% during the period in question.
  • NMC Healthcare, the Abu Dhabi based healthcare provider traded strongly as it started to benefit from changes in the law in Dubai which now obliges companies to provide health cover for all their foreign workers.
  • Abcam, the leading supplier of antibodies on-line to research scientists worldwide, performed very strongly. As a UK exporter of over 90% of their products, the weakness of Sterling is very beneficial. It may be of interest to shareholders that these shares were first purchased in 2007 at a price of around 65p compared with 770p on the 30 June 2016.
  • PaddyPower, has rocketed following the merger announcement with Betfair. Paddy’s superlative marketing prowess combined with Betfair’s unique betting exchange capabilities opens up intriguing “price rush” and margin enhancement possibilities. This share has returned in excess of 1100% since it was first bought in December 2004.

Other strong performers included GB Group, the identity verification company, JD Sports Fashion, the branded footwear led retailer who is expanding rapidly into Continental Europe, Mattioli Woods, the wealth manager, Sanne Group, the specialist fund administrator and First Derivatives, the financial regulation big data software provider.

In terms of relative performance, the Numis benchmark constituents that they didn’t own caused problems. Not owning Al Noor, the other Abu Dhabi based healthcare group that was acquired by Mediclinic, was negative. This vast combined entity with a market capitalisation of over GBP8 billion performed strongly as it trades in non-Sterling jurisdictions. Not owning Evraz, the Russian integrated iron & steel company was negative as ore price rose in 2016. Centamin plc, which operates a single gold mine in Egypt, rose strongly alongside the gold price in 2016.

In addition, Restaurant Group announced a series of profit warnings as its lead format Frankie & Bennys started to run out of steam and Workspace, the London based managed work centre company, has been sold off as it is perceived to be exposed to the weakness in the secondary London property market.

SLS : Standard Life UK Smaller Companies beats benchmark by 10%

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