The fund has a small cap focus but still invests in some fairly big firms
Thursday 21 Mar 2019 Author: Steven Frazer

Many retail investors avoid small cap companies as there is a perception that the space is littered with too many inexperienced management teams, unproven business models and threadbare balance sheets.

Then there’s the extra volatility and difficulties in even buying and selling these types of shares.

This is perhaps why tapping into the expert help of a specialist fund manager is often seen as a solution. Yet even the experts struggle sometimes.

Judging stock markets is about as difficult as for some time, David Stevenson tells Shares. He calls the fourth quarter of 2018 for the AIM market ‘a nightmare’.

Stevenson is co-manager of the TB Amati Smaller Companies (B2NG4R3) fund. Illustrating the point, the fund’s cash position is about twice its typical 5% of assets while it waits for clear investment opportunities.

The Amati fund is flexible with its ‘smaller companies’ badge, casting an analytical eye over pretty much anything outside of the FTSE 100. Seven of its 10 largest stakes are in FTSE 250 businesses. Even Burford Capital (BUR:AIM) – which is listed on AIM so does not qualify for the main indices – would otherwise be within sight of a FTSE 100 qualification with its rough £3.9bn market value.

Former fund favourite Auto Trader (AUTO), for example, is being gradually sold down over the coming year after December’s promotion to the blue chip index following a 15-month 50%-odd share price rally.

Other past successes include upmarket mixer drinks maker Fevertree (FEVR:AIM), power switching kit designer XP Power (XPP) and DiscoverIE (DSCV), the electronic components maker that is now following a similar growth path to XP Power by designing more niche equipment itself.

AIM REMAINS THE MAIN TARGET

AIM remains the core focus, as does its bottom-up stock selection approach. ‘We’re still stock picking,’ says Stevenson, looking for ‘quality businesses that can keep growing over the longer-term’ where returns can be compounded over the years.

Typically holding around 55 to 65 stocks, ideas are drawn from various wells, not least the deep knowledge of its managers. Amati is a great believer in team ethic. Other sources include simple number crunching and a network of industry contacts.

Perhaps Amati’s key advantage is that the asset manager also runs a venture capital trust, backing start-ups and micro-businesses, so it already has a good understanding of any new companies that join AIM’s ranks, even ones where Amati was not an active investor.

Stevenson is also looking at thematics, niche markets where there excellent structural growth and disruptive potential and where individual companies have some sort of barrier to entry.

‘The internet allows asset-light businesses to emerge,’ says Stevenson, and this is impacting how much people will pay, referring to price-to-earnings multiples in excess of 20, high by traditional measures.

Compliance and regulatory risk software specialist Ideagen (IDEA:AIM) is an example that rolls off the fund manager’s tongue, a company whose share price has increased more than three-fold in the five years or so since it moved up from the old Ofex market, and one of Shares’ own running Great Ideas.

Auto engineer AB Dynamics (ABDP:AIM) is another Stevenson likes a lot, and is also familiar to us – it was our best performing pick for 2018, rallying 58%. We silently wonder if Stevenson has been plundering the Shares archive for ideas (probably not).

He admits that money is now being drawn out of AB Dynamics after such a fine run but it is clear this is a business Amati continues to rate highly.

HIGH CONVICTION TO HIGH QUALITY

The benefit to investors of the funds’ strategy is reflected in an impressive benchmark-beating performance in each of the past five years.

‘The fund has outperformed the Numis Smaller Companies plus AIM ex-IT index and the UK Small Cap Equity category average by 5.4% and 4% per year on average respectively,’ calculates Morningstar analyst Samuel Meakin.

Cut another way, the Amati fund features in the top decile of its category for the trailing three, five and 10 years and is top quintile in the trailing 15 year period, according to Morningstar.

There are something like 1,700 companies to choose from within Amati’s wider smaller companies universe. That creates a lot of potential for wealth creation in both the short and the long term.

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