Meet the manager: Artemis UK Smaller Companies’ Mark Niznik

HL Meet the Manager: Mark Niznik 

For investors in the Artemis UK Future Leaders plc investment trust who wish to know more about their new manager, below is an edited version of an interview with Mark Niznik, who also runs the Artemis UK Smaller Companies Fund.

What differentiates you from other small-cap managers?

“To start with, 80% of UK small-cap funds are more growth-oriented than the overall small-cap index¹. Me and my co-manager Will Tamworth deliberately try to position our fund differently to others in the market and we do this by taking a very strict price discipline. It's very easy to get carried away with the hype of a really good story in this sector and we believe focusing on valuations helps protect our investors from that trap. We also think it gives us better returns over the long term: smaller companies can offer lots of growth potential to investors but they can also be higher risk.”

What red flags tell you to avoid a company?

“A consistent lack of cash generation is a big red flag to us. We believe cashflow (the money coming into and going out of a business) can be a great predictor of companies that might be getting into a little bit of trouble. Many investors will focus on profits, but again we try to be a bit different to that in looking at cashflow as we think this is more difficult to fiddle than profits. In this way, we believe we avoid more sharp accounting practices or outright scams, which helps protect our investors from falls in share prices.”

We have seen a lot of takeovers in the UK small-cap market in recent years as well as a slowdown in the number of IPOs (initial public offerings). How has that changed the opportunity set?

“Will and I see takeovers and IPOs as two sides of the same coin: there are very low valuations in the UK stockmarket² which are even lower in small-cap land³, so if you're an entrepreneur you're not going to want to float your business at a very low valuation, hence the dearth of IPOs⁴. But similarly, takeovers are going to happen when valuations are low, so we've had 32 of our companies taken over in the last six years at an average premium of 47% (to their pre-offer price)⁵. So low valuations are good news for investors in that regard.

“The other thing I'd point out is it's undeniable that if companies get taken over and IPOs don’t happen, the available pool of investments is reduced. But there is still a huge amount of choice in the small-cap market, with more than 1,000 quoted companies to choose from⁶; about half of these are investable, in our view. So there's plenty of choice and at the moment it's very exciting because valuations are so low.”

Interest rates are now much higher than they have been in the relatively recent past. How are the smaller companies you're invested in dealing with that challenge?

“One of the misconceptions about smaller companies is they have a lot of debt, but that’s not the case⁷. The median holding in our fund has no debt⁸, meaning there is little direct impact from higher interest rates. We believe that what is important for small caps is economic confidence and what we've been lacking in the UK is confidence: the confidence for consumers to spend money and for investors to buy shares. Our perception is that it will only take a very small change in confidence – for things to be less bad than the prevailing narrative – to make some really good returns in this sector.”

You've spent your career investing in the UK. What top investment tip have you picked up along the way that might be useful for you when you started?

“That’s very simple: don’t look at adjusted profits (a profits metric that excludes distortions such as one-off gains or losses), look at cashflows. That would have saved me a lot of money.”

All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in.

Who would you say has had the biggest influence on your investment approach?

“My dad, who taught me the importance of listening. A lot of people, especially in this industry, talk a lot, but you don't learn by talking, you learn by listening, which has really helped me in my career. At Artemis, I’m surrounded by some very clever colleagues, such as Will and the fund managers in the UK, US and bond teams, and I listen to them all. I am also very privileged in that Will and I get to meet management teams who've grown some really great businesses from absolutely nothing, so we try to absorb some of their knowledge by listening.”

How do you switch off outside of work?

“Playing boardgames with my family. The favourites would be Uno, Qwirkle and Bananagrams. I tend to always lose but my daughter tells me I'm having a good time.”