AMATI UK LISTED SMALLER COMPANIES FUND: UK small businesses can still offer investors ‘land of opportunity’
Investors in UK small business funds have had a torrid time over the past 12 months. Rising interest rates, investor disinterest in the sector, and chaos in broader financial markets have all contributed to depressing stock prices for many companies held by these funds, regardless of their sub-investment quality. underlying. Few funds escaped with overall one-year losses of less than 20%.
Among them is the £619million fund Amati UK Listed Smaller Companies. The fund, managed by Edinburgh-based Amati Global Investors, posted year-on-year losses of 25%, just above the average for the sector as a whole (23%).
Although managing director Paul Jourdan, part of a five-person investment team overseeing the fund, says it’s impossible to predict the market bottom, he thinks we’re getting closer. “The stock market is two years ahead,” he adds. “There are catalysts that will bring it up at some point.”
Jordan believes these catalysts include signs that the interest rate cycle may now be peaking lower than some financial experts thought amid the financial crisis created by Kwasi Kwarteng’s September gungho mini-budget. “Consensus estimates now indicate that interest rates could peak at 4.5%, not the 6% everyone was predicting a few months ago,” he adds. “The earlier the peak is reached and the lower it is, the better for stock markets.”
Other catalysts, according to Jourdan, could be a revaluation of the British stock market by international investors on the back of a government now determined to reduce borrowing and bring some stability to financial markets.
He says: ‘The money that has been taken out of the UK stock market this year is the biggest for 20 years.’ If those outflows dwindle, the worst of the storm will be over and it could be a land of opportunity in the small business sector.
Diversity is the order of the day. Not only does the fund benefit from the involvement of five experts in the construction of the portfolio, but it is also well diversified. The 69 individual holdings, all listed on the UK stock market, are broadly spread across sectors, ensuring that the fund’s fortunes are not tied to any particular economic outcome.
So, at one extreme, he owns stakes in insolvency practitioners such as FRP and Begbies Traynor – just in case there’s a fallout on austerity-era companies and higher taxes than Rishi Sunak and Jeremy Hunt just announced.
At the other end of the spectrum, he also has stakes in homebuilders such as Vistry and MJ Gleeson, although the outlook for the housing market – in the short term at least – is not promising. “Rising interest rates have dampened activity in the housing market,” says Jourdan, “and construction of new homes has declined.
“But if interest rates start to come down and the price of new fixed rate mortgages becomes more competitive, the market will improve.”
The fund also has key stakes in a number of investment managers such as Liontrust, Polar Capital Partners and Rathbones – companies that earn recurring commissions on the funds they manage on behalf of investors.
The total annual charges of the Amati fund are reasonable at 0.84% and the fund pays a small dividend equivalent to just over 2% per year. As a business, Amati manages assets of around £935m with a preference for smaller UK businesses. But it has also launched funds hoping to profit from the demand for strategic metals and innovation.