Charles Montanaro once said: "It is vital to meet the executive management when investing in small caps and carefully watching body language for clues. In the jungle, it keeps you alive; in the City it helps you to make money."
Those are the views of the manager of this week’s best in class, who can best be described as one of the more adventurous and colourful characters in the fund management industry.
Mr Montanaro has made it something of a life skill to find hidden gems – whether it be as a fund manager, or as an anthropologist searching for the likes of undiscovered tribes in the Amazon.
His travels have seen him live with the Huaorani tribe in Ecuador – who are seen to be the fiercest warriors in the Amazon – to the Yanomami of Venezuela.
He was even detained by the “civilised folk of the Caracas” after being perceived to be a potential CIA spy and narrowly avoiding deportation.
The team invests in simple, understandable businesses for the long term and is unafraid of completely avoiding complex sectors such as biotech, miners, insurers or banks.With a career that stretches back four decades, Mr Montanaro has grown his company from scratch to become one of the most respected small-cap asset managers in Europe, with £2.4bn of assets under management.
This week’s best in class, Montanaro UK Income, was launched in 2006.
It is a high conviction portfolio typically consisting of 40 to 50 stocks and invests primarily in small and mid-cap companies quoted in the UK that offer an attractive dividend yield or the potential for dividend growth.
The manager is supported on the fund by an 11-strong team of investment specialists who research their own investments rather than relying on external brokers.
This is borne out in performance, with the fund producing top quartile returns in the Investment Association UK All Companies sector over five years to June 5 2019, returning 47.5 per cent compared to an average return of 29.1 per cent, according to data from FE Analytics.
The fund was one of a number to be removed from the UK Equity Income sector by the Investment Association for failing to meet a set income requirement of 90 per cent of the FTSE All-Share yield during 2015.
The rules have since been relaxed but the fund has not moved back. It continues to pay a yield which currently stands at 3.9 per cent.
The investment process is based on a simple philosophy of investing in companies you can understand, buying things which are growing, backing quality management, engaging with your companies and not over trading. Wider macroeconomic factors are ignored.
The team invests in simple, understandable businesses for the long term and is unafraid of completely avoiding complex sectors such as biotech, miners, insurers or banks.
Montanaro’s analysts conduct detailed fundamental analysis on every potential holding. Only after a company has passed a number of rigorous internal tests can it be added to the approved list for potential investment.
The fund's focus on quality has historically helped provide some downside protection in falling markets versus other small-cap funds.
Mr Montanaro also avoids “lobster pot” Alternative Investment Market companies, due to their increased volatility and liquidity challenges.
The fund has an overall charges figure of 0.86 per cent, according to FE Analytics, February 2019.
Mr Montanaro believes UK small-caps continue to look cheap compared to equities on the other side of the English Channel and across the Atlantic, adding that the team expect investors with high allocations to overseas equities to address their underweights to sterling one day.
“It would be little surprise if the currency rebounded in the event of a Brexit breakthrough. In such a scenario, the quality companies within the fund should be well placed to benefit. And in the intervening period, with a dividend forecast of 3.9 per cent for 2019, investors are being paid to wait,” he added.
This fund offers something different to investors by way of a UK income solution that steers clear of the traditional large-caps so many other funds rely upon.
Naturally the fund carries additional risks given its greater exposure to smaller companies, but the focus on quality companies has helped to manage this and makes it an attractive option for investors.
Darius McDermott is managing director of FundCalibre
