WS Amati UK Listed Smaller Companies

This is an unconstrained, bottom-up stock-picking fund investing across the UK's small and mid-cap market, including companies listed on AIM. The managers focus on quality, growing businesses that they believe can increase revenues and profits sustainably over the long term. They look for characteristics including barriers to entry, a competitive advantage, revenue visibility, pricing power, sustainable growth, an adequate balance sheet and the ability to finance growth, incentivised management with a good track record, and takeover potential.

The team also looks closely at what could go wrong. ‘Red Flags’ they avoid include: aggressive accounting; growth by acquisition; consistently reporting ‘exceptional’ items; poor profit to cash conversion; competitive threats from larger companies or new technologies; significant liabilities; lumpy income; and ‘fashion’ stocks.

Fundamental research and access to company management are central to the process, with the team forming its own view of each company's quality and long-term prospects. Valuation is important, and the managers love to buy cheap businesses when they can, but they think it is much more important to find the right companies first.

The portfolio is under constant re-appraisal and stocks are sold when either the original investment premise no longer applies, there are better opportunities, the sector or macro outlook is deteriorating or there are signs of poor corporate governance.

This is a high conviction portfolio of typically 40-50 stocks, investing across UK small and mid-cap companies. Smaller companies can be more volatile and less liquid than their larger counterparts, and these risks can be particularly pronounced among smaller AIM-listed businesses. The fund's growth bias can also result in periods of significant underperformance when this investment style is out of favour.

Liquidity is actively monitored and the portfolio maintains exposure to larger small and mid-cap companies to help ensure the fund remains sufficiently agile. Individual holdings typically start at 1-2% and can grow to 3-4%, with positions generally trimmed if they exceed 5%. Sector positioning is primarily a result of individual stock selection, while diversification and liquidity are monitored as part of the team's ongoing risk management.

The managers understand that they needs to incorporate as many factors as possible into their decision making, and therefore integrate ESG analysis alongside financial decisions as a matter of course. Some of the ‘red flags’ they avoid in the process come under the umbrella of ESG issues.

On the environmental side, they will look at issues surrounding climate change and contamination, including within supply chains of companies. On social aspects, they will look at labour policies and customer treatment, as well as human rights, with the aim to avoid unequivocal social negatives, and on governance they will look at factors such as pay, conflicts of interest and corporate culture. On the latter, the managers will engage with firms where they identify issues, as governance has the largest impact in this end of the market.

While these factors alone do not ultimately determine the selection of investments made within the fund, they do form an integral part of the process of identifying the risks and opportunities associated with such investments.