Standard Life upbeat on small-caps recovery

By David Brett

LONDON (Reuters) - Smaller British companies will continue to lead the market higher as the necessary factors to imbue investor confidence and optimism are now in place, Standard Life's small-cap fund manager said.

"In terms of the stock market action there is now a realisation that savage interest rate cuts and quantitative easing are having an effect," said Harry Nimmo, manager of Standard Life's UK smaller companies fund, which holds gross assets of around 62 million pounds.

"Investors are realising that, and this is the real turning point this time." The FTSE small-cap index .FTSC has risen 19 percent so far this year, outperforming the FTSE 100 .FTSE, which has fallen 2.8 percent.

Nimmo told Reuters the trend will continue with money-flow improving as financial advisors gain trust in recommending equities and investors realise the return offered by British small-caps was far better than that offered by their bank.

Data from Lipper showed Nimmo's fund has returned minus 26.2 percent over the past year, compared to an average return of minus 28.3 percent for peers in the Lipper Global benchmark for British small and midcap funds. It has underperformed marginally on a six-month and one-month view.

Nimmo said two out of his three conditions for a full upturn had been met earlier in the year -- low interest rates and director sharebuying -- and the third had arrived.

"Earnings forecasts are coming right. Particularly in retail and early cycle sectors, some of which are beating expectations. We've yet to see it in the late cycle sectors but forecasts are becoming more realistic. All the blocks are in place for a solid recovery."

JD Sports (JD.L), the sports retailer connected with a possible bid for JJB Sports (JJB.L), and Denelm (DNLM.L), the home furnishings company, which recently reported a solid third-quarter update, are two recent additions to the fund.

Numbers on Tuesday from the British Retail Consortium appeared to back Nimmo's positive view of the sector, with Aril's figures nominally very strong, as like-for-like sales rose 4.6 percent.

The fund has also been bolstered with the recent purchases of property companies Derwent London (DLN.L) and Shaftesbury (SHB.L) and cinema chain Cineworld (CNE.L).

"Shaftesbury has the firepower to pick up stray choice property assets. Derwent is well run with a strong balance sheet and Cineworld has the ability to purchase stray assets, plus it has a strong roster of new releases," Nimmo said.

The fund manager also saw a bright future for online gaming.

Paddy Power (PAP.I), one of the funds top 10 holdings, conducts 70 percent of its sports betting on the internet and could be one of the companies to benefit from embryonic moves in the United States to legalise online gambling.

"The legislation is good. And for companies like Playtech (PTEC.L) a leader in online gaming software if U.S. businesses want to get involved in the online gaming market," he said.

The result of Nimmo's play-it-safe philosophy is that his small-cap fund has underperformed its benchmark, The HGSC Total Returns index excluding investment trust, which is up around 28 percent in the year-to-date, but it is still delivering returns of 16 percent.