It is a tiny fund, unnoticed by most, that has become an almost accidental hero. Amati is a name that few will be familiar with, but the boutique operator’s only fund, a UK smaller companies trust, is likely to find many new followers in the coming years.
Over three years, the fund is currently ranked third in its sector out of 46 rivals, while over one year it is second. The mystery is how few investors know of it. Despite a record stretching back to September 2000, it still has just £25m under management. Some of its bigger brethren have capacity issues, but that’s hardly a worry for Amati.
It is run by the firm’s founder, Dr Paul Jourdan, with co-managers David Stevenson and Douglas Lawson. Just four other individuals make up Amati’s head office in Edinburgh, plus another two in London.
It is Jourdan who says the table topping position is almost accidental. “It is designed to be a very mainstream fund, one basically able to invest in everything outside the FTSE 100. It is not aggressively run for short-term performance. It is an accident we are top of the table. We don’t buy everything with beta that moves.”
The portfolio is something of a barbell, with 80 per cent of the fund’s holdings in the bottom 10 per cent of the market but with most of the rest in the upper part of the FTSE 250.
“We want some large companies so we can maintain liquidity. But some of our best ideas come from the other end of the spectrum. They are proper small caps,” says Jourdan.
He typically holds 50-70 stocks, with 63 at present, and is guided by an extraordinarily long track record – 16 years at the fund’s helm – which means he has seen several market cycles. His typical holding period is around two and a half years, but he holds onto some for much longer. The fund’s biggest holding, Smart Metering, at just over 5 per cent, was first bought after it floated five years ago, with extra purchases since.
“It’s a good stock for defining what we do. It’s an installer of smart meters on behalf of the utility companies. It installs them and then rents them to the utility provider, with phenomenal contracts, over 25 years and updated by RPI,” says Jourdan.
The stock performed well after flotation, but then traded sideways for three years. But it has been one of Jourdan’s best performers over the past year as investors have woken up to the potential of the much bigger residential meter rollout. Since last August it has jumped from around 350p to 460p.
FDM, a recruitment company, is another of his favourites. It takes in around 1,000 IT graduates a year and effectively rents them out to big corporates, pocketing half the persons earnings, and generally securing them a full-time job at the end of it.
“You could have written it off as just another recruitment company, but it has reinvented recruitment,” says Jourdan. It is currently on 630p, up from 490p a year ago, with a share price graph that vividly highlights the impact of Brexit – falling very sharply on the day and seeing a recovery since.
But much of the fund’s outperformance is down to a decision three years ago to have a large exposure to UK consumer and retail stocks, such as Ted Baker, Howdens and Cineworld. But you will no longer see them among his top stocks. “I began to feel that they had become very crowded investments, with the headwinds from Brexit weighing heavily on people’s minds,” says Jourdan.
Ahead of Brexit, in a timely move, he began investing in stocks exposed to the gold price, and the fund is now 9 per cent exposed to the metal. He admits, though, he was wrong-footed by the result. “We didn’t think it was going to happen and when it did the fund dipped by 9 to 10 per cent.”
But the rest is history. In the aftermath, stocks in domestically-focused areas were hammered, but the small cap indices have retraced all their losses, and gone higher.
“What’s happening is that with interest rates at zero and income difficult to find, the market is viewing many small caps as really decent growth companies that should trade at a premium,” says Jourdan.
The market also underestimated the amount of dollar-denominated earnings among the small caps. Today that has reversed, with stocks pricing in further falls in sterling, he adds.
Jourdan reckons almost every asset class is currently expensive, saying that the market is in “Alice in Wonderland” territory. But while he acknowledges that stocks are expensive, he says that at least small caps have growth, so valuations are not outlandish. And though he’s not especially trying, the fund earns dividends of around 1.7 per cent.
Like other founder-managers of asset management groups, Jourdan’s own money is invested heavily in the fund. “I’m sure an adviser might say I ought to diversify more, but there are more than 63 stocks in the fund, so that’s enough diversification for me.”
Most relatively new fund management groups opt for planetary or financially-connected brand names. Jourdan’s doctorate, however, was not in finance but in the history of music. Amati was the greatest ever violin maker, says Jourdan – and his approach is all about finely crafting an investment.