Old Mutual’s ‘Bitter’ Brexit Year Prompts Smallcap Stock-Picking

  • Politics “is very difficult to call” for 2017, firm says
  • Fevertree, Paysafe are among stocks owned by the fund

A year of political turmoil has made Daniel Nickols wary of relying on sector trends to guide his investment strategy.

After being burned by last year’s surprise Brexit decision, the manager of the Old Mutual U.K. Smaller Companies fund is favoring stock picking instead. The $1.1 billion fund, which typically bases about a third of its equity selection on sector or thematic analysis, is abandoning the strategy in 2017 in an attempt to avoid “second-guessing wider trends” as political events dominate. Among stocks he prefers are Fevertree Drinks Plc, a maker of soft drinks and mixers, and payment solutions provider Paysafe Group Plc.

“There’s the economic data, there’s politics as well, and the latter is very difficult to call,” Nickols said in an interview. “Bitter recent experience tells you if you try to get that right, you’re bound to be wrong.”

Nickols’ fund, which he has managed for more than a decade, gained about 11 percent in 2016. While that’s in line with the advance in the FTSE Small Cap Index, it’s about half the fund’s returns in the previous year. Nickols says the gains were limited because the fund was overweight retailers at the time of the U.K. referendum -- among the worst-hit sectors in the aftermath of the vote.

Continued risks surrounding the process of leaving the European Union, coupled with uncertainty about Donald Trump’s U.S. policies mean bets on themes like inflation are too risky this year, he said.

Some of Nickols’ single-stock bets have paid off. Fevertree, which he bought at the time of its 2014 London listing, has surged ninefold since then and closed at a record on Monday. The firm’s plans to expand in the U.S. make it attractive, he said. Paysafe, another holding, has had a rockier ride: it slumped to a 14-month low in December after short seller Spotlight Research disparaged the company, before rebounding 25 percent. It’s still up more than 90 percent since the end of 2014, the year Nickols bought the shares.

The fund manager says he won’t necessarily play it safe for the whole of 2017. As expectations of global reflation increase “people are selling out of quite expensive, dull, safe stuff and going for racier, economically sensitive stuff.”

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