TB Amati UK Smaller Companies: April 2022 fund update

How it fits in a portfolio

TB Amati UK Smaller Companies aims to achieve long-term growth by investing in the smaller parts of the UK stock market. Companies of this size are often overlooked by analysts, meaning there are plenty of opportunities for investors prepared to scratch below the surface. The team adopts a sensible approach which favours quality businesses and avoids excessive risk. That said, by nature smaller companies are higher risk so this fund could be suited to an adventurous portfolio focused on growth.

Manager

The fund is managed by Dr Paul Jourdan, David Stevenson, Anna Macdonald and Scott McKenzie using a team-based approach which enables them to have eyes in all corners of the market and leave no stone unturned.

Dr Paul Jourdan co-founded Amati Global Investors in 2010 and was initially the sole manager. His management career began in 1998 and he’s since built up a wealth of experience analysing companies listed both in the UK and around the world. Jourdan is also the chief executive of Amati Global Investors, but we believe he is able to devote enough time to running this fund.

David Stevenson joined Amati in 2012 and started his career as an accountant before working in various investment roles including corporate finance, private equity, and listed equity. Anna Macdonald was recruited in 2018 as the team continued to expand. Starting her career at Henderson Global Investors (now Janus Henderson), Macdonald has held various fund manager positions throughout her career, mostly with a UK focus.

The trio became a quartet when Scott McKenzie joined the team in April this year. He joins from Saracen Fund Managers and brings over two decades of experience managing UK portfolios.

They’re supported by analyst Dr Gareth Blades, who joined in 2019. His academic and life sciences background means he’s particularly involved in researching healthcare companies. All team members also manage other portfolios at Amati, but they’re all focused on small UK companies too, and the majority of their time is spent on this fund.

Process

The team’s process centres around detailed company research and they invest the fund differently to the benchmark, which could boost performance potential. They look for companies that can grow faster than their competitors, usually through carving out a niche in a growing market or disrupting the traditional way of doings things. These tend to be high quality, financially robust companies with talented management teams. They avoid those that are speculative, highly indebted, or lack the edge to compete with larger, better resourced businesses.

The team invest with the long term in mind. They start by investing 1-2% in each company and, if desired, build this over time to a maximum of 5%. Investments that exceed that size are trimmed. Other factors such as poor governance, a fading outlook or finding a better alternative will also trigger a sale.

The team carries out quantitative analysis and meet company management to find ideas. One of the most useful sources of investment ideas is their VCT (Venture Capital Trust) portfolio which focuses on even smaller companies in the early stages of growth. Over time they get to know these companies well and often in a lot more detail than the wider market. Once they reach the required size, the managers already have a great insight should they wish to invest in the company in this fund. They will only invest at or after IPO (when a company is listed on a stock market) though and will only be considered if they offer as much opportunity as already listed companies.

All of this analysis whittles a universe of around 1,000 companies to a final portfolio of currently 73 holdings. Although the fund sits in the IA UK Smaller Companies sector, the businesses in the fund generate revenue from around the world. 46.6% of the revenue generated comes from UK operations, with 14.7% from Europe, 23.5% from North America and 15.2% from the rest of the world.

In recent months the managers have made a number of changes to the fund. They added a new position in publishing and advertising group Future. They think the migration from print to digital which has been boosted by the pandemic could drive profits margins higher. They also bought shares in oil & gas producer Serlca, which they believe could benefit from the cashflow generated by current higher energy prices. In terms of sales, the managers completed their sale of shares in audio equipment supplier Focusrite in favour of better opportunities elsewhere.

As part of our analysis, we consider a fund’s liquidity – a measure of how easy and quick it is for the fund manager to buy and sell the investments within the fund. This is particularly important for smaller companies, which tend to be less liquid than the shares of larger or more established businesses. This can increase risk because, as an example, it can make it difficult to trade shares or heighten share price falls if many investors try to sell at the same time.

This becomes more important as a fund grows in size, as it means the fund manager is likely to own a greater proportion of the shares of the underlying companies and can make the fund less nimble. As the TB Amati UK Smaller Companies fund has continued to grow, we recently conducted an in depth analysis into its liquidity profile, including using our own data and meeting with the fund managers. We currently remain comfortable with the fund’s level of liquidity and believe it continues to allow the managers to follow the same investment approach. We will continue to monitor this closely and, as always, let investors know if our analysis or views change.

Culture

Amati Global Investors, the business behind the fund, specialises in investing in small-to-medium-sized UK-listed companies. We like this dedication to this investing niche, as it means the business is primarily focused on finding the best growth potential within the UK smaller companies’ sector.

The business is majority-owned by its employees, and all staff are encouraged to invest in it. We view this positively, as it means the managers and staff share a long-term view and it aligns their interests, and that of the business as a whole, with investors.

ESG integration

The managers consider environmental, social and governance (ESG) factors as part of their investment process and adopt a clean trade approach which means they avoid companies that support oppressive regimes. Amati fund managers and analysts actively engage with the companies they invest in, although their approach to engagement is not as well defined as some of their peers.

Amati Global Investors are signatories of the United Nations-backed Principles for Responsible Investment and the UK Stewardship Code. They use all votes and publish quarterly voting records which can be found on the company’s website. The firm also produces an annual Stewardship report which includes a range of engagement case studies.

Cost

The fund is available for an annual ongoing charge of 0.89%. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund’s long-term performance record has been strong with the fund significantly outperforming its benchmark since Paul Jordan became manager of the fund. Over the last five years, it’s returned 67.43%* vs 50.30% for the IA UK Smaller Companies sector average. Our analysis suggests this is the result of strong stock selection, especially in the healthcare and technology sectors. Remember past performance doesn’t indicate future returns.

Historically this fund has held up better than the IA UK Smaller Companies sector average when markets are falling which we would expect given the focus on quality. The fund has also tended to marginally outperform when markets are rising. It’s important to remember during periods of market stress, smaller companies have tended to be more volatile than large ones. Smaller companies are also less liquid (their shares are harder to trade), which can heighten falls if many investors try to sell at the same time.

Over the last 12 months the fund has fallen by 8.17%, falling by more than its sector average return of -2.13%. Among the biggest detractors over this period was materials and textiles company HEIQ which saw sales growth held back by a shortage of chemical supplies and margins held back by significant cost increases. Some of the fund’s positions performed well over the year though including OSB Group. The company has delivered strong lending growth leading to improved interest margins and high returns on equity.

Investing in smaller companies is higher risk and investors should invest for the long term and be prepared for volatility along the way.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2022.

More on TB Amati UK Smaller Companies, including charges

TB Amati UK Smaller Companies Key Investor Information