Happy hunting in the middle ground

The Money Observer Fund Awards for 2009 - in association with Lipper - aims to highlight the funds in each sector which have achieved the best results over the past three years, maintaining consistently good performance without turning to undue risk-taking - even in these uncertain times.

As the economic situation has deteriorated investor preferences have swung in favour of large, defensive companies. Two years ago it was medium-sized companies that were setting the pace, fuelled by high levels of merger activity. But despite the shift Paul Spencer, manager of Rensburg UK Mid Cap Growth, our award winner in this category, is sticking to his guns.

"We keep the approach as straightforward as possible. We are quite dogmatic. The fund is 100% invested in companies in the FTSE Mid 250 index and if they move out their shares will be sold immediately. I feel if you don't do this it dissipates your thought process. And it has worked in my favour. When Taylor Wimpey (TW-) and Punch Taverns (PUB) moved into the FTSE 100 (UKX), for example, I sold them and afterwards their prices crashed."

After taking over the fund in February 2006, Spencer cut the number of holdings in the portfolio from 83 to 43. He prefers to run a high-conviction portfolio. He says the last three years have been particularly testing. "We have had everything thrown at us. The first year was a bull market, the second two were falling markets, but we have shown we can outperform in both scenarios."
     
He describes his approach as "stockpicking, framed by a top-down approach." From a macro-economic perspective, he became bearish on UK consumers about two years ago, although over the last six months he has become slightly less pessimistic and started buying early cyclical stocks again such as housebuilders and retailers on attractive valuations.

He does not have a fixed template for valuing companies. "The black box approach does not work with mid-cap companies, especially in uncertain times. You have to be pragmatic."

As well as being right about consumers two years ago, he attributes his success over the last three years partly to "being good at avoiding disasters by steering clear of companies with high levels of borrowing."

He is not unhappy that the merger and acquisition activity in his part of the market, due to the easy availability of cheap credit, has come to an end. "I think it is good news for investors because it means a return to fundamental analysis of long-term cash flows and dividends rather than whether there is a bidder round the corner."


For the second year in a row, the highly commended fund in this category is Standard Life UK Smaller Companies. Three years ago it was our overall winner, which underlines the consistency of its performance. It has been managed by Harry Nimmo since its launch more than 10 years ago.

Nimmo's aim is to identify improving situations that are not fully recognised by the market. As smaller companies tend to be less well researched than larger ones, he regards meeting company management and site visits as a particularly important part of the process. To spread risk, he usually holds between 50 and 70 stocks.
 
In recent times, he has been focusing on companies he believes are resilient with strong balance sheets and cash flow, as well as diversified international revenues.

Although its primary focus is on smaller companies, Nimmo does not necessarily sell companies as they increase in size. Currently just over 60% of the fund is invested in medium-sized companies in the FTSE 250 (MCX), while 30% is in new issues and AIM.

Nimmo accepts that the near-term outlook for smaller companies is currently 'challenging' as they tend to be more cyclical and exposed to the UK economy. But he believes the medium term is starting to look more positive.