TB Amati UK Smaller Companies won the Money Observer Best Smaller UK Smaller/Mid Cap Equity Fund award in 2017. It’s managed by a three-person team consisting of Paul Jourdan, Douglas Lawson and David Stevenson, who also run two Alternative Investment Market (Aim)-focused venture capital trusts. The fund focuses on firms with a market capitalisation of less than £500 million, from those on Aim up to the FTSE 250 index. The benchmark is the Numis Smaller Companies Index.
The managers look for ‘high-quality growth stocks,’ says Douglas Lawson. He adds that when stocks do well in the team’s venture capital trusts, they get promoted into the fund. ‘We get to know small companies early on, so that we can buy them before other fund managers notice them – it doesn’t always work out, but that is the idea.’ They seek out companies with a high level of intellectual property and the ability to commercialise it; they avoid businesses with no clear competitive advantage and those whose larger rivals are dominating the market.
BUY: FFI Holdings (Aim:FFI)
‘Our preference is usually not to buy companies at initial public offering (IPO), because it’s usually helpful if a company spends a bit of time in the market first to become familiar with what is expected of a public company,’ says Lawson. But for this stock the team made an exception, buying in the IPO at the end of June for 150p per share; the share price hasn’t changed much since, but Lawson says that the team’s intention is to hold companies for five years plus, as they don’t look for quick returns.
The company provides completion contracts to the film industry, mainly in Hollywood. When a film producer finds a financier to fund a film, the financier can buy insurance in case the film doesn’t complete on time and on budget. ‘It’s a difficult thing for insurance companies to price,’ says Lawson, because it includes factors such as the reliability of the producer, director and actors, and even the weather.
The company has provided this service since the 1950s and has 85 per cent of the market share. It also ‘takes on an oversight role, to try and influence the timetable and budget while a film is being made, so it can price that insurance.’ Then, to de-risk, it sells the contract on to other insurance companies who don’t have the specific expertise needed – effectively acting as a specialist broker. ‘There are big barriers to entry here, as financiers will only deal with an experienced and well-capitalised firm,’ says Lawson. In addition, it has interesting growth opportunities in China, which has a burgeoning film industry.
HOLD: FDM Group (LSE: FDM)
FDM is a hybrid IT and staffing services company, providing IT professionals for financial institutions and other industries. Lawson says: ‘The difference from other staffing agencies is that it trains people at the clients’ sites.’ FDM now claims to be the second-biggest graduate recruiter in accounting.
The company trains people and they remain on its payroll but then go on to work for the client. ‘As it’s training people in specific IT skills, a very high proportion have already been placed once they finish their training,’ because the company knows what kind of professionals its clients are looking to hire, and when.
‘It’s a very slick operation,’ says Lawson, ‘and it has high growth, high return on capital, and an inspirational chief executive who is well liked by his staff.’ Its growth outlook is very good: there is an increasing trend for financial institutions to take on people through the company rather than employing them directly.
The team first bought the shares in June 2014 at 287p; they are now worth 908p. The stock has about a 2 per cent weighting in the fund portfolio, and the team has topped it up as inflows into the fund have continued.
SELL: British Car Auctions (LON: BCA)
This company has car auction sites in UK and Europe. ‘It’s a very good business, but the reason we sold it is that the market is negative for car retailers,’ explains Lawson. He says that in new car sales figures, a big influence is personal contract hire deals, where you rent a car for three years then hand it back, paying only interest and depreciation costs on the car, rather than the capital.
So as soon as used car values start to soften, prospects for the company worsen. ‘While it’s a dominant business in its territory, it is going to face reasonably significant headwinds,’ adds Lawson. The Amati team first bought the stock in 2013 at 150p per share and sold it for 206p in June 2017. Now the shares trade at 190p.
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