In times like these I always go back to the view that small and mid-caps outperform their larger peers long term.
Small-caps in particular stand out on this metric; they really are the gift that keeps on giving, particularly in the UK. Liquidity is a big fear for small-caps, and the UK has had to contend with both Brexit and the pandemic in the past five years, yet the FTSE UK Small Cap Index has comfortably outperformed the FTSE 100 over that period (40.3 per cent vs 26 per cent).
In my eyes, UK small-caps have already passed the acid test and there is no reason why they cannot continue to outperform long-term from here. But you also need the right management team in what is a pure stock-picker's market – and that is where this week’s fund excels.
The TB Amati UK Smaller Companies fund is run by a five-strong investment team, which includes Paul Jourdan, who co-founded Amati Global Investors in January 2010. The fund had a different name in the past, and Jourdan has been managing it since 2000. He is joined on the portfolio by David Stevenson, Anna Macdonald, Gareth Blades and Scott McKenzie.
As an unconstrained, stock-picking fund, it focuses on structural growth businesses, which the managers says can add value in the 'under-brokered' small and mid-cap part of the market.
Ideas are generated from FactSet screening – companies that have come through from the VCT, company meetings and opportunistic placings.
They then look for the following attributes: barriers to entry; a competitive advantage; revenue visibility; pricing power; sustainable growth; an adequate balance sheet and the ability to finance growth; incentivised management with a good track record; and takeover potential.
Red flags they avoid include: aggressive accounting; growth by acquisition; consistently reporting ‘exceptional’ items; poor profit to cash conversion; competitive threats from larger companies or new technologies; significant liabilities; lumpy income; and ‘fashion’ stocks.
The companies the fund invests in should consistently create value by re-investing returns at a higher rate of return than their cost of capital. The team will scrutinise company accounts in detail prior to any investment and the managers will also look at board structures and management incentives.
Meeting company management teams is important, and they generally have face-to-face meetings before they invest, although sometimes a conference call will be enough.
The team does not believe in setting absolute price targets. Valuation is important and the managers love to buy cheap businesses when they can, but they say it is much more important to find the right companies first.
The team will make use of broker research, but it is never the sole factor in determining an investment decision. The team will always form its own views on the quality of a business and company management.
The portfolio is well diversified with around 65 to 70 stocks. Liquidity risk is taken very seriously, and the portfolio will always invest in some companies in the £500m to £2bn market cap space to ensure the fund remains agile.
Largest holdings at present include specialist mortgage lender OSB Group (3.3 per cent), Accesso Technology (2.8 per cent) and Atalaya Mining (2.7 per cent). Over the past five years the fund has returned 103 per cent to investors compared to 82.4 per cent for the sector average. It has an ongoing charge of 0.89 per cent.
We like funds that have a solid framework and the consistency in performance to match. This vehicle has both in spades, with few peers able to match the expertise of this UK small and mid-cap boutique. It is undoubtedly a standout player in an extremely competitive market.
Darius McDermott is managing director of FundCalibre
