Amati UK Listed Smaller Companies: April 2024 fund update

• Amati’s co-founder, Dr Paul Jourdan, has been investing in smaller companies for over two decades

• The team based approach leaves no stone unturned in the hunt for smaller UK companies with lots of growth potential

• Long term performance is strong, but has been weaker in recent years

• This fund features on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Amati UK Listed Smaller Companies fund 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. The fund could add diversification to the UK portion of a more adventurous portfolio, or one focused on larger, more established businesses. Its growth focus could also complement other investments in out-of-favour value companies.

Manager

The fund is managed by Dr Paul Jourdan, David Stevenson 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. Scott McKenzie joined the team in April 2021 from Saracen Fund Managers and has over two decades of experience managing UK portfolios.

The managers are 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.

In April 2023, previous co-manager of the fund Anna Macdonald left Amati but we remain confident that the team is well resourced for the task at hand. 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. 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.

This analysis whittles a universe of around 1,000 companies to a final portfolio of currently 62 holdings. They invest where the company share prices look attractive when compared with their growth prospects. 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.

Over the last year, the managers have made some changes to the portfolio. New investments over this period include the European rail ticketing platform Trainline and wealth manager Brooks MacDonald. Share buybacks continue to be a prevalent theme across the UK market and this fund is no different. A number of companies held in the portfolio are undertaking share buybacks which can benefit long term investors. This is when a company purchases its own shares in the stock market when it thinks they are undervalued.

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

Amati’s fund managers consider a number of ESG related issues in their investment process, including issues arising from supply chains, climate change and contamination, unequivocal social negatives such as profiting from addiction or forced labour, board membership, remuneration, conflicts of interest (such as related party transactions), business leadership and culture.

The company also adopts a Clean Trade approach, which means avoiding companies that support the most oppressive regimes and engaging positively with those that uphold Article 1 of the International Covenants on Civil and Political Rights, particularly in relation to the extraction of natural resources

Amati fund managers and analysts actively engage with the companies they invest in, and the team uses all votes. A quarterly voting record is published to the firm’s website, although there is little in the way of rationale

Cost

The fund is available for an annual ongoing charge of 0.86%. The HL platform fee of up to 0.45% per year also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

The fund’s long-term performance record has been strong with the fund significantly outperforming its benchmark since Paul Jordan became manager.

However, more recent performance stretching over the last few years has been lacklustre. Over the last 12 months, the fund has delivered a return of -1.08%* to investors, behind the IA UK Smaller Companies sector average return of 4.75%. The managers investments at the higher end of their risk tolerance in earlier stage growth businesses, including at IPO, where investor risk appetite has fallen have hurt performance.

Over the last 12 months, payment processing business CAB payments and advertiser The Pebble Group have been among the largest detractors from the fund’s performance. Though it’s been a difficult year, not all of the fund’s investments have performed poorly. Subsea technology company Ashtead Technology and software business Cranware have been among the fund’s better performers.

Despite recent performance being disappointing, we’re confident that the experience of the managers, the resource dedicated to the fund and the company’s focus on UK Smaller Companies investing means they can deliver for long term patient investors.

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