Small-cap stalwart shrugs off sugar tax impact

Small-cap stalwart shrugs off sugar tax impact

Paul Jourdan, co-manager of the Amati UK Smaller Companies fund, has backed drinks maker Fever-Tree to flourish, despite one of its flagship products being subject to the sugar tax announced in the Budget.

Fever-Tree, known for its premium tonic water among other soft drinks, is the second largest holding in the fund, but it will be affected by the new tax.

In his latest Budget, Chancellor George Osborne announced soft drinks companies would have to pay a levy on beverages with more than 5 grams of sugar per 100ml, to come into force from April 2018.

A higher rate tax will apply for drinks with more than 8 grams per 100ml. Fever-Tree’s flagship Tonic Water product contains 8 grams of sugar per 100ml.

In spite of the changes, Mr Jourdan remains confident that demand will continue for premium mixers.

“Fever-Tree sells its mixers as a premium product so the percentage impact on its prices would be limited compared with other soft drinks,” he said.

“Also, the consumer for Fever-Tree is less price-sensitive than the consumer of, say, Coca-Cola or Pepsi.”

The manager initiated his position at Fever-Tree’s initial public offering in November 2014 and has continued to add to the holding since, bringing it to 3.1 per cent of the fund.

He called the company a “classic growth story”, and thought the drinks market would evolve to favour luxury brands.

Fever-Tree was the largest holding in the fund until Smart Metering overtook it in January this year, when Mr Jourdan increased the weighting to 4 per cent.

The company owns energy meters in the UK and rents them out to utility companies. There is a high termination fee, so contracts tend to be long term.

Mr Jourdan topped up the position as he thought the UK government’s mandate for all homes to use “smart” energy meters to monitor gas and electricity consumption in real time would further boost the company’s growth.

He said the fund was a “plain vanilla UK smaller companies fund”, and invests 80 per cent of its assets in the smallest 10 per cent of the UK market.

He cited a combined study between the London Business School and Numis, which found there was a link between taking the potential additional risk of buying smaller companies and higher returns.

“Over the 55-year period they had studied, the amount of return you get for buying small companies is a [lot more than] 3 per cent per year, compounded over 55 years, so obviously that’s a massive difference,” he explained.

“And in an era of low interest rates and a sluggish global economy, we think the logic for buying small companies is more compelling than ever.”

While historically low rates could push investors to consider the fund, increases to interest rates tend to act as a headwind to smaller firms.

But Mr Jourdan remains unconcerned about the current environment.

“I suppose one has to take a view about what kind of environment we are in,” he said.