361. Has the UK small-cap winter finally thawed?

19 June 2025 (pre-recorded 17 June 2025)

Please be aware that the accuracy of artificial intelligence-generated transcripts, such as those utilised in our interviews, may fluctuate based on factors like audio quality, subject matter complexity, and individual speaker enunciation. Consequently, these transcripts are unlikely to achieve 100% accuracy. However, it is important to note that, at FundCalibre, we do not consider the correction of automatically-generated captions to be an effective or proportionate use of resources.

Given the inherent limitations of machine-generated transcription, we strongly advise against relying solely on this transcript when consuming our content. Instead, we encourage you to use the transcript in conjunction with the accompanying interview to ensure a more comprehensive and accurate understanding of the topic.

Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening.

[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. UK smaller companies have had a tough run, but signs of a turning point may be emerging. In this episode, we explore the recent market dynamics, investor sentiment, and why the long-neglected UK small-cap space could be poised for renewed interest and better performance in the months ahead.

James Yardley (JY): I’m James Yardley and today I’m joined by Scott McKenzie, fund manager at the Amati UK Listed Smaller Companies fund. Hello, Scott. Thanks very much for joining us today.

Scott McKenzie (SM): Thank you for having me, James.

[INTERVIEW]

JY: Now, Scott, I mean, it’s been an incredibly challenging period for UK smaller companies. I can’t remember a period in my career where we’ve had such a tough time. But I mean, are we finally at the point where we’re turning a corner? I mean, we’ve seen seven years of underperformance I think in UK equities. What’s changed recently to make you feel a bit more optimistic for the sector?

SM: Well, thank you for the reminder there, James. Seven years is quite a long time, isn’t it? Yeah, I mean, from where we sit, you know, with our UK smaller cap bias, it’s certainly been possibly three, four years now. You know, where we’ve really felt the pressure from the strategy and from the lack of love in the asset class.

I think there are some early signs of a turnaround and the recent events with the Liberation Day and the Trump tariffs, I think that possibly has marked a turning point for what we do in the UK. And I think there’s no potentially a better and wider audience for UK equities in general and for small-caps in particular. So we’ve now begun to see our own fund and small-caps in general, perform somewhat better than they have done. Just it’s early days. We’ve only had, you know, maybe three, four months of better numbers from the fund. But nonetheless, you know, there’s some early signs of better times ahead.

JY: Yes, I mean, April was a very volatile month for equities globally. Of course we had Trump’s tariffs came in and markets have moved all over the place, but UK small-caps have actually held up reasonably well I think, and have bounced back quite strongly. Can you talk us through why the fund outperformed in that period and hopefully is this the start of something bigger over the next months and years to come?

SM: Yeah, I mean, it certainly felt like a bit of a turning point. As you say, April was an extraordinarily volatile month. One of the most volatile months any of us can remember in living memory. And I think what was encouraging was that our asset class, you know, finally began to get itself ahead of the global indices. Obviously the US markets were particularly badly affected in the early part of that month. So small-cap was actually one of the better performing asset classes, you know, during April. And I think you get to the point where we’ll perhaps come on and expand on this topic, but we feel as though, you know, the selling will dry up at some point and there are now a lot more interest in the asset class.

And to buy in small-cap is relatively difficult. And we’ve always said for a while now that it will not take much to turn the market for UK equities and for UK small-cap in particular around. And you know, I think we’re now beginning to see some early signs of demand being greater than supply.

JY: Are you starting to see some of those flows come in from institutional investors or some of the bigger investors, maybe some of the pension funds and things? I mean, I know that there’s been a focus from this government on trying to get pension funds to invest more in the UK. I think most of that focus has probably been on the private space, but are you seeing a little bit at the margin coming in the public equity markets?

SM: We we’re not quite seeing it yet. And, and certainly from where we sit, we’re not yet seeing the evidence of money coming in. At this moment in time we just want to see a situation where things stabilise in a way we don’t see outflows. And clearly outflows have been an enormous challenge for all UK funds in particular, small cap. And we’ve not been immune from that.

So the early part of this year we were still seeing your know, challenges and terms of outflows you touch with that has now dissipated. And hopefully we’re on a much firmer footing, you know, than we were a couple of months ago. I mean, you made reference to pension funds there, you know, that there has been a lot of talk about, things such as the Mansion House Accord which is, you know, pledging more support for UK assets that won’t necessarily touch public markets immediately.

The kinda focus of that is predominantly, you know, private assets to begin with, but interestingly enough, it does include AIM within that definition, which yeah, something we could perhaps come back to in a moment. And, you know, AIM has obviously been a particularly challenged part of the UK small-cap market. So there is some hope that, you know, there will be a modest benefit to AIM from those types of accords. And we are seeing some early evidence that one or two local authority pension funds are now upping the allocation to UK listed companies as well. So it kind of feels as though we may have turned the corner, but you know, it’s still early days.

JY: And with all the ongoing talk around tariffs, I mean, is that good news for UK small caps or is it still presenting challenges for some of your businesses as well? I mean, is this a moment for UK investors to maybe think about reallocating some of the money perhaps, which has gone overseas in recent years and bring some of that back home?

SM: I think what happened in April is definitely a wake up call for investors in general, you know, and we’ve had a long period of US dominance in the global markets and that’s been the market to be in for a number of years now. And I think what the tariff kind of uncertainty has brought is some reappraisal of that dominance. This is what they call US exceptionalism now. It feels as though that’s been, you know, you have to at least challenge that. And I think therefore, relatively speaking, the UK markets are quite well placed and particularly small-cap.

The small-cap index tends to be more exposed to the domestic economy and what we’ve seen, you know, with regard to the tariffs strengthening and sterling, and that’s generally good for, you know, importers, domestic sectors such as retail, for example. You know, they’re a beneficiary of weaker selling, sort of stronger selling. And I think there’s just in general a reappraisal going on between where people allocate their money on a global basis. And even if we take a very tiny scrap from the table there, it’s still a meaningful amount for UK investors. So I would hope that we’re now seeing the beginnings of a reappraisal in terms of asset allocation.

JY: And the AIM market, as you mentioned, I mean, it’s had its fair share of challenges in recent years. There’s been a fair bit of uncertainty on the inheritance tax benefits there and things, and the government’s been changing the rules on that. And where are we now with the outlook for AIM? I mean, is it now a much better index than it was in the past? Has it been refocused? Are there lots of good high quality companies there for you? I mean, well, how do you feel about it?

SM: You’re right that it’s been an extremely challenged part of the market and that remains the case. You know, it’s an index and an element of the UK stock market that does need some reform. We haven’t seen enough, you know, exciting companies join the market. And if anything, we’ve been losing companies, you know, predominantly to takeovers. So, there’s no silver bullet for AIM as we speak.

Your point about quality companies as well made, you know, there are still lots of companies that we can invest in an AIM and we’re really pleased to do that. So one thing that we haven’t done in the fund is run away from AIM, if anything, we’ve kind of run into the fire and we’ve increased our exposure to AIM, if anything within the Amati UK Listed Smaller Companies fund. And we currently have a almost half of the fund in AIM listed securities.

So, if anything we’ve increased our exposure to AIM it’s always been a major part of what we do at Amati. And I think now is the time to actually embrace it rather than run for the exits. But we can’t deny that the market for AIM listed shares are shrinking.

I mentioned takeovers a moment ago. You move that’s an ongoing feature with an AIM in terms of companies being bid for. So we, we have to be mindful of that, and there certainly aren’t enough new companies coming to the market. Interestingly enough, though, we have seen some fundraisings in AIM, you know, a couple of very notable ones in the past six to nine months.

We were fortunate enough within our fund to participate in the placing Greatland Gold, which was kind of towards the end of last year. And that’s been a really, really successful investment for us. You know, so we’ve ridden the crest of that wave and the gold price very well, and that company’s more than doubled in value since it raised its money in AIM last year. And more recently we’ve had a very significant fundraising from a company called Rosebank which has just literally raised 1 billion pounds in AIM, you know, so a pretty material amount of new equity going into AIM for what is effectively a share company run by the managers of a business called Melrose, which is been a very successful listed company in London over the past 20 years. So there is an appetite for really good fundraisings in AIM. Those two have been, you know, very good examples. We’re just not seeing enough of them. And we’re certainly not seeing IPOs. We’ve only really had one of any notes in the current year, and that’s MHA accountancy business. So the challenges remain absolutely, but we can also find some great businesses within that market and if anything we are doubling down on it.

JY: I mean, that, that’s, that’s very interesting. I mean, and where are we on valuations in UK forecast? We keep hearing that they’re cheap, but they seem to have been cheap for a very long time. I mean, whenever I look up a company, I’m surprised at how small some of the market caps are relative to what are quite serious big businesses, you know, with tens of millions in revenue. But maybe I don’t understand <laugh>, I mean, I don’t look at them like you, but are they as cheap as people say, or do we actually need to see kind of that cyclical upturn and for some better earnings as well for before we really get some good performance?

SM: Yeah, I mean, this is something, you know, we’ve really been banging on about for quite some time, and you, you feel almost like a stock record really in terms of the valuation metrics, myself and the rest of the team, we’ve been really running small company funds for many, many years, and it’s difficult to remember a time where they’ve been so out of favour. And when we look at the valuation of our own portfolio you, although the portfolio has gone up in value over the past year, the valuation metrics haven’t changed at all. They’re still extraordinarily low compared to a historical analysis. And whatever metrics you choose whether it’s, you know, good old fashioned PE ratios or cashflow yields you know, or price to book, they’re all at very depressed levels.

So valuation isn’t really the problem here. But it does tell a story of your undervaluation of UK assets both compared to overseas markets, the US in particular, and also relative to private assets, so when we look at companies in the private markets, they tend to be at much higher valuations than those in the public markets. For example, wealth management is a sector which I’m sure most of your listeners will know quite well, and the quoted companies are generally trading at very depressed values, whereas some of the private businesses, you are kind of realising much better valuations. So that suggests to us there’s a structural undervaluation of UK listed companies and to be honest, for us, that is an opportunity. It shouldn’t be a threat. It should be a fantastic opportunity to buy great businesses at bargain prices. And that’s really what we’re trying to do with the fund.

JY: Very good. And in terms of the flows though, I think been one of the big problems is the UK retail funds keep shrinking. I mean, what are you seeing on that front? I mean, is there any reason that those flows are potentially going to turn around? I mean, we touched on it before that maybe people might be bringing back some of their allocation from the US and things. I mean, what are you seeing there? And do we need those flows to come for the asset class to really to really start performing again?

SM: Well, I think the flows that you refer to are predominantly in the retail funds arena, you know, and there’s a lot of good data comes out on a monthly basis on this Gallstone, do a particularly well followed series here. And, you know, that’s a fairly gloomy and depressing series and has been for, you know, three or four years now you know, that has remained the case in the current year. Interestingly enough, the month that we just had, April, you know, those outflows have begun to moderate a little bit but they’re still not positive, so we have to acknowledge that I mean, you made reference to the pension funds a moment ago, and, you they could dwarf anything that would happen in the retail funds world.

So we kind of take the view that most of the retail funds selling has to be over by now and it won’t take a great deal to turn the ship around. There’s no immediate evidence yet of that happening, but certainly what one also has to consider the impact of non-UK investors. What we are seeing, both anecdotally and in the markets, are real evidence of US and European investors buying UK assets. You know, so that is definitely one of the reasons why we think, the sentiment towards UK has improved because overseas asset allocators are now buying the UK. And we see that in things like the Bank of America survey, which, you know, for a long, long time has been extraordinarily negative about UK equities. And in March for the first time ever, it turned quite positive, so that tells me that there is a lot of global interest now in the UK stock market, even if our retail investors aren’t quite there yet.

There are other investor groups who are definitely, you know all over this. And the other part to that story, I think is the increase in takeover activity. We’ve seen a lot of takeover activity in recent months and sectors, you know, such as technology companies such as Alpha Wave, Alpha International Group, which we own in the fund. That’s company and discussions with the private equity business. Just the other day we did a bit of a Spectra, the engineering company, and that was, you know, the shares went up almost 60%. So this considerable interest, you know, from private equity and non-UK investors in the UK stock market. So we don’t necessarily need the retail investors to return with a engines. I think there’s a combination of factors which can turn the market around.

JY: So Scott, to kind of summarise then, I mean, what is your outlook for the next 12 months? So there any sectors or themes which you are particularly excited on and what should investors look out for?

SM: I think we’re pretty excited in general about the prospects for the portfolio now and investors and smaller companies have been through quite a lot in recent years, including our own investors. You know, we are definitely not satisfied with how things have gone for the fund in the last three or four years. But, you know, for the first time in a long time, we feel genuinely excited about the prospects for great returns across the portfolio. And you know, we made reference earlier to things such as AIM, we remain massively committed to AIM. It’s 50% of the fund and we can see considerable upside in a lot of the holdings that we’re invested in there. So that’s something that we’re excited about in a broader sense.

And there are just no shortage of new things and new ideas that we can bring into the fund. And that tells us that, you know, that the markets are still, very keenly valued when you’ve got lots of new ideas, that’s generally a good sign. We tend not to run the fund on a sector or top down basis. So we’re very much bottom up stock pickers, but just to give you a flavour of some of the things which are now making a difference to sectors such as the gold sector I mentioned Greatland Gold a moment ago, and that’s been a really super investment for us. A real success story in a short period of time. Again, an AIM listed company. So that’s been really pleasing.

We’ve also built up our exposure to the defence sector, which in the current environment feels, you know, like a good place to be. We’re now seeing, obviously defence budgets being reallocated across Europe and indeed increased. So that’s a segment again where we see, you know, good prospects and we’re already seeing good returns. But over the piece, the combination of the valuation and the liquidity when it improves, we think mean that we’re at the early stages of a really strong market cycle for UK small-cap. So definitely feeling much more positive than we have been for some time.

JY: That’s brilliant. Scott, thank you very much for all those insights. That’s been absolutely fascinating.

SM: Thank you, James.

SW: An unconstrained portfolio, seeking structural UK growth businesses that can grow faster than the economy, WS Amati UK Listed Smaller Companies fund is managed by a highly experienced team of small-cap specialists. The portfolio of 65-70 companies focuses on structural growth businesses, which the managers believe can add value in the under-researched small and mid-cap part of the market. To learn more about the WS Amati UK Listed Smaller Companies fund please visit fundcalibre.com