Fund Manager Focus by Jenny Lowe

Investors who decided to try their luck and invest in small-cap funds last year certainly won’t have been disappointed, with the average fund delivering a return of 51 per cent. Close Special Situations, however, topped the table, posting a staggering 300 per cent return over one year.

Deryck Noble-Nesbitt, the fund’s manager, attributes this outperformance to its contrarian approach. ‘As the bear market moved through sectors in 2008 and 2009, the fund added to stocks that had fallen to long-term attractive levels’.

Noble-Nesbitt has a flexible and pragmatic approach to investment, and this means that nothing is ruled out, with each potential investment being assessed on its own merits. ‘The emphasis in the approach is very much on value, based on what I believe the shares are worth and what price they are trading at in the market. I also consider a broad range of issues such as balance sheet strength, capital intensity, sales growth and margin potential.’

Safety in gold
The fund currently has around 35 stocks, among them Norseman Gold. ‘If you want exposure to gold you can buy the largest producer in the world, Barrick, or you can buy a basket of smaller gold producers listed in the UK,’ says Noble-Nesbitt. ‘The basket looks better value to me, and Norseman is an example.’

He also likes the look of pharmaceutical company Renovo, explaining, ‘there is a well-documented belief that global pharmaceutical companies face a “patent cliff” over the next five years, and yet the biotech sector, a potential source of new drugs, remains out of favour because of its capital-intensive nature.

‘Renovo is well funded, and management’s interests are aligned with shareholders’ – deferred bonuses not vesting unless the drug trials are successful. Although this is not a typical holding, it certainly has its place in a diversified portfolio.’

Nestor Healthcare, the largest UK independent organisation dedicated to providing managed services to the UK health and social care market and the biggest holding in the fund, is another that Noble-Nesbitt believes is a ‘simple growth stock’: ‘The macro driver is simple – ageing baby boomers should provide natural growth in Nestor’s market. It appears to have gradually overcome many legacy issues that have affected the shares over recent years.

‘Some still exist, including a pension deficit, onerous leases and losses on some interest rate derivative contracts. However, despite taking these negatives into account, and assuming only modest growth in the next five years, the shares appear significantly undervalued.’

He concludes, ‘In this context, my own particular preference, when thinking about the investment outlook, is to continually ask the question: can I identify a group of equities that, blended together, forms a portfolio with attractive investment characteristics? I believe the answer to this remains yes and therefore I am still cautiously optimistic about the long-term prospects of the fund’.