AMATI UK LISTED SMALLER COMPANIES FUND: UK small companies can still offer investors ‘land of opportunity’
Investors in UK smaller company funds have had a torrid time over the past 12 months. Rising interest rates, investor disinterest in the sector and chaos in the broader financial markets have all conspired to drive down the share prices of many companies that hold these funds, regardless of their underlying quality. Few funds have escaped with a loss of less than 20 percent over a year.
Among them is the £619m fund of Amati UK Listed Smaller Companies. The fund, managed by Edinburgh-based Amati Global Investors, posted an annual loss of 25 percent, slightly higher than the industry average of 23 percent.
While CEO Paul Jourdan, who is part of a five-person investment team overseeing the fund, says it’s impossible to predict the bottom of the market, he believes we’re getting closer. ‘The stock exchange looks two years ahead,’ he adds. “There are catalysts that will drive it up at some point.”
Jordan believes these catalysts hold signs that the interest rate cycle could now peak lower than some financial experts thought during the financial crisis triggered by Kwasi Kwarteng’s Gungho September mini-Budget. “Consensus estimates now indicate interest rates could peak at 4.5 percent, not the 6 percent everyone predicted a few months ago,” he adds. “The faster the peak is reached and the lower, the better for the stock markets.”
Other catalysts, Jourdan says, could be a revaluation of the UK stock market by international investors backed by a government now determined to reduce loans and bring some stability to financial markets.
He says: ‘The money withdrawn from the UK stock market this year is the largest in 20 years. If this outflow subsides, the worst of the storm will be over and an opportunity for the smaller companies could emerge.”
Diversity is the order of the day. Not only does the fund benefit from five experts contributing to the portfolio construction, but it is also well diversified. The 69 individual holdings, all listed on the UK stock market, are broadly diversified across sectors, meaning that the fund’s assets are not dependent on a single economic outcome.
So on the one hand it has holdings in insolvency specialists like FRP and Begbies Traynor – in case there are corporate references through the era of austerity and higher taxes just introduced by Rishi Sunak and Jeremy Hunt.
At the other end of the spectrum, it also has holdings in homebuilders such as Vistry and MJ Gleeson, even though the outlook for the housing market – at least in the short term – is not promising. “Higher interest rates have brought housing market activity to a halt,” says Jourdan, “and new home construction has slowed.
“But if interest rates start to fall and the price of new fixed-rate mortgages becomes more competitive, the market will turn for the better.”
The fund also has significant holdings in a number of investment managers such as Liontrust, Polar Capital Partners and Rathbones – companies that benefit from recurring fees for the funds they manage on behalf of investors.
The total annual expenses of the Amati fund are reasonable at 0.84 percent and the fund pays a small dividend equal to just over two percent per annum. As a company, Amati manages assets of approximately £935 million with a preference for smaller UK companies. But it has also launched funds in hopes of capitalizing on demand for strategic metals and innovation.