Funds Centre

Old Mutual UK Select Smaller Companies - research update

Having witnessed a sharp, synchronised global slowdown Dan Nickols, fund manager of the Old Mutual UK Select Smaller Companies Fund, believes the economic stimulus packages are sufficient to make a positive difference. He has taken comfort from

Bernanke, Fed Chairman, suggesting that the US economy may start to recover towards the end of 2009. On this basis he believes we could see signs of the stock market bottoming and a potential recovery from the middle of this year. Dan Nickols admits there are still plenty of hurdles to overcome but there are other reasons to start considering the stock market.There is a shift underway in favour of consumer orientated stocks and away from some of the defensive sectors. The manager thinks an increasing trend by consumers toward saving as opposed to spending tends to be followed by outperformance of retail stocks. Housing approvals and transactions appear to be finding some kind of base making it possible to value housing related stocks. The prospects for mid and small caps relative to large caps is improving, due to the high number of economically sensitive companies in this sector.

Overweight positionsSupport services and Aerospace & defence, but this exposure is likely to fall.General Retail, household names such as WH Smiths but are looking to increase risk slightly with companies that are more sensitive to the economic climate such as Topps Tiles.Pub groups and restaurants, favouring the more conservatively financed businesses such as JD Wetherspoons and Mitchells and Butlers.House builders, an example is Persimmon, currently priced less then the value of its underlying assets.

Underweight PositionIndustrial Cyclicals (such as machinery and building-materials companies)General FinancialsPharmacueticalsReal Estate, although exposure to this area is likely to increase.Oil Services, capital spending budgets are under pressure due to the low oil price.

Our conclusionWhen things become clearer and the markets start to find a substantial base there is a good case that smaller companies could lead the rally. Following the flight from risk over the past year, some small and medium sized companies were indiscriminately dumped. Others have struggled to find finance, and have ceased to exist, exacerbating the overall situation.If we see the recent monetary and fiscal policies successfully feed through the economy many smaller companies could expand rapidly. In general, small cap stocks are more sensitive during times of economic change and will undoubtedly be volatile.Dan Nickols and his team are one of the best in the UK, we are confident they can take full advantage of any potential in the small and mid cap arena. The fund has outperformed their benchmark since launch. But please remember past performance is not a guide to the future.As we are seeing debt paid down and savings per household rise this could support the manager’s increasing interest in the retail sector. Please remember that no-one sounds the bell at the bottom of the market. Dan Nickols and his team are becoming increasingly positive albeit sooner than other fund managers and are therefore positioning their fund accordingly. Their sentiment on the market has moved from a red light to amber, we hope to let you know when they turn green. However, given their impressive track record and the potential within the team, we wouldn’t like to bet against them.Graeme Baker, Analyst> Key Features of the Old Mutual UK Select Smaller Companies Fund