The manager of the Standard Life Investments UK Opportunities Fund has found handsome rewards by seeking out companies' untapped potential
Mark Niznik attributes the strong performance of the Standard Life Investments UK Opportunities fund to good stock selection. He remains positive over the prospects for small and medium companies in the medium to long term.
Standard Life Investments markets its UK Opportunities fund as an opportunity to take advantage of companies' untapped potential. And, as its performance record since launch testifies, that philosophy has paid off handsomely for investors.
The aim of the fund is to provide long term capital growth by investing in any quoted company on the UK stock market outside the FTSE 100 index and as Mark Niznik, the man at the helm, explained it has demanding targets.
He said: "What we are hoping to do is to beat the benchmark index for the fund every single calendar year and by doing that, over a three- to five-year period, we would hope that that annual outperformance would put us in the top quartile of the UK All Companies sector league table."
It is an approach that clearly works. Standard Life Investments launched the UK Opportunities fund at the end of 2002. For 2003, as a whole, it delivered a return of 44%*, 3% ahead of the benchmark index**. Last year, the return was 27%*, a full 4% better than the benchmark** and the cumulative two year rise of more than 80% earned the fund fourth place in the UK All Companies sector over that time period.***
The key to achieving such performance lies in careful stock selection. Niznik, who has managed the fund since its launch, explained how he goes about that task, saying: "The process that the UK Opportunities fund uses is in three parts. The first is to spend as much time as possible with the chief executives and finance directors of the companies in which we are looking to invest. For example, last year I had more than 500 one-to-one meetings both in my office in Edinburgh and up and down the country.
"The second stage is to make sure every single company in the fund passes three qualitative tests. They must have a good business franchise before we would decide to invest. By that we mean some kind of competitive advantage, high barriers to entry and a differentiated market share position relative to others in the marketplace."
Niznik is looking for financial strength, a good track record of earnings growth over the years and evidence that the cashflow per share matches the earnings per share. In addition, the company must show a good return on its sales and its capital. If it can satisfy each of these requirements, the company will then move onto phase three of Niznik's assessment.
"The third test is one of a reasonable valuation so we are buying into the shares at the right price," he explained. "We use a very rough and ready price to earnings growth measure. We are looking for a price that looks like good value relative to the prospects for earnings growth."
With each of these boxes ticked, Niznik applies the insight and knowledge he has acquired during 18 years in the investment industry. "The final point in the process is to try and be a contrarian investor, to try and pick up stock when others in the market don't like it. So it is a case of attempting to do the opposite to the herd instinct that's generally prevalent in the market at any given time."
The UK Opportunities fund draws on the expertise of Niznik's colleagues in the four strong smaller companies team, which is headed by Harry Nimmo and covers every company in the small cap universe.
It also taps into the knowledge of Standard Life Investments' large cap managers, who operate under the experienced eye of David Cumming and look at all of the FTSE 100 and the Mid 250 stocks.
Niznik commented: "This is important because it means that between the two groups, we cover the entire UK quoted stock market. Each of our Funds at Standard Life Investments can draw on this big expertise pool."
To illustrate how the process works, he points to Northgate plc, one of the largest holdings in his fund.
He said: "This is a very good example of a company with a great business franchise. Northgate is the market leader in the UK in renting vans. They have a market share of about 18%, which is three times greater than their next market competitor, GE Capital. Now that gives Northgate much better buying power when it is buying vans from the manufacturers. This in turn allows Northgate to pass on these buying efficiencies, either to its customers in cheaper prices, or to keep that margin differential for itself in terms of profitability - that's a good business franchise."
He tells a similar story for Incisive Media, another of the fund's key holdings, underlining the financial strength that stems from its good business franchise.
"They are the leaders in their respective sectors and this has allowed Incisive to establish a great track record of uninterrupted earnings growth since it floated around seven years ago. On average, the company has grown about 30% a year."
Although he believes that life will be more testing for smaller companies in 2005, Niznik remains upbeat on prospects on a medium to long term view. "I don't think there's any doubt that in 2005 it is going to be much tougher to make money, given the outperformance we've seen from the previous two years," he admitted.
"However, if you look at the historic valuations of small and mid cap shares, relative to their large cap counterparts, they have often traded on a premium and we would agree that the growth prospects associated with this area of the market justifies the difference. So we're still very positive that small and mid caps are a good place to invest money."
* Source: Standard & Poor's Micropal, bid to bid to 5 January 2004, and 3 January 2005 respectively.
**Datastream, bid to bid to 1 January 2004 and 31 December 2004 respectively. *** Standard & Poor's Micropal, bid to bid, 1 January 2003 to 3 January 2005.
key points
• Mark Niznik is aiming to beat the benchmark every calendar year with his UK Opportunities fund.
• Careful stock selection is the key to strong performance by the fund.
• Small and mid caps remain well-placed for strong long term performance.
