OMAM’s Nickols: UK small caps to jump 10% in second half

Dan Nickols, Old Mutual Asset Managers’ (OMAM) top performing small cap manager, has backed share prices to soar in the second half of the year by 10% or more.

Nickols, running the £580m UK Select Smaller Companies fund, said the Hoare Govett Smaller Companies ex-ITs index had risen just 1% in the past six months, and was in line for a sharp upward move before 2012.

“The UK equity market has basically gone nowhere over the past six months, even though earnings estimates have gone up,” he said.

“The market has to move at some point and last year it went up around 25% in the second half. It is certainly possible it can do double-digit growth again if our central case comes to fruition.”

Markets have been volatile in recent months, see-sawing between euphoria and despair as the Greek crisis unfolds in Europe and the US recovery shows signs of stalling.

Nickols said his central scenario was for a set of measures to be put in place for Greece – which last week survived a crucial double vote on its tough austerity plans – allowing investors to refocus on the recovering global economy.

“The global economy is actually set to grow real GDP by around 4%, and if that is borne out, then earnings forecasts are too low, and we should see revisions,”
he added.

Nickols is playing global growth rather than UK growth by structuring the majority of the portfolio towards companies with international exposure.

Around 38% of the constituents in the Hoare Govett index derive sales from overseas, and Nickols is overweight the sector, with around 60% of the portfolio located in the space.

The fund has suffered a bout of underperformance over the past year, returning 29.5% compared to the IMA UK Smaller Companies index return of 32%, according to Morningstar.

Nickols said waves of risk aversion have impacted the market over the past twelve months, hitting the portfolio’s cyclical stocks.

“Within the past year you have seen a protracted phase of risk aversion, with our economically sensitive stocks not delivering the bang for our bucks,” he said.

“However, the companies are actually doing what we expect in terms of the numbers they are reporting so we are comfortable.”

The short-term dip in performance does not detract from longer term returns, with the fund top quartile over five years after returning 64.6%, compared to a sector average of 36.8%.