Standard Life UK Smaller (SLS) has reported its annual results to 30 June 2020, with total NAV and share returns coming in at (0.5%) and (0.1%) respectively. The company’s reference index, the Numis Smaller Companies plus AIM (ex-investment companies) index, returned (10.7%). March was a particularly sombre month for the UK smaller companies sector – SLS’s portfolio lost close to 40% of its value over the month.
‘Up to 40% of holdings cut dividends’
SLS’s managers, Harry Nimmo, Abby Glennie, and Amanda Yeaman, had this to say: “Following the outbreak of the COVID-19 pandemic, smaller companies responded quickly to the emergency, where necessary furloughing staff, shoring up balance sheets, cutting dividends, taking pay cuts, working from home where possible and keeping investors in touch by conference calls. Some sectors were effectively closed down, such as transport, restaurants, leisure and retailers. Others saw substantial declines in activity, including industrials, construction, oil & gas, some real estate and some media. Others were unchanged, such as some media, asset managers, speciality financials and other real estate. Certain sectors actually benefitted from working from home, such as leisure goods, on-line retailing and food manufacturing.
Unlike during the banking crisis, the company saw significant numbers of holdings cut or suspend their dividends, perhaps as much as 40%. Although latterly a number have reinstated dividend payments as the outlook has generally improved from the extreme pessimism of late March.
The weakest part of smaller companies was the cyclical heavy FTSE smallcap index while the growth rich AIM market recovered strongly in the April to June period.
The oil price as measured by Brent oscillated between $82 per barrel in January 2020 and $19 in March. Indeed the West Texas Intermediate version fell into negative territory for a brief period as storage in the US ran out and demand collapsed. Copper started the year at $285, fell to $218 in March 2020 before rising to $291 by the year-end. The gold price rose steadily by 35% from $1,409 per oz to $1,901, representing a flight to safety.
Acquisition & Merger activity in smaller company markets was subdued, with no holdings in the portfolio bid for. However, in the post-COVID rally, fund raising by the issue of new equity was very buoyant. Listed companies were either shoring up their balance sheets to see them through what is expected to be a tough time, economically or raising war chests in anticipation of good value purchases in the economic fallout to come. Not surprisingly, the hard-hit travel and leisure sector was at the forefront of fund raising activity with fully 17 members of this sector raising money.”
Managers had been anticipating a downturn for some time
“We actually feel more confident about smaller companies now. The downturn that we have been predicting for at least five years now has arrived. The sector as a whole has underperformed for the last couple of years in anticipation of the downturn, as in 2007 and 2008 in the lead up to the banking crisis. The first half of the next upturn is normally positive for the smaller companies sector relative to larger companies. The AIM market has come of age with a preponderance of profitable growth businesses and wide sector dispersion. We feel the pipeline of new listings will improve from current low levels as markets recover. There are still a wide range of UK companies coming through that match our investment criteria, with a number of new smaller names having been added in the recent past.”
SLS: Annuals from Standard Life UK Smaller following long-predicted downturn