Anna Macdonald: hunting down the big companies of tomorrow

Merryn talks to Anna Macdonald of Amati Global Investors about the opportunities in UK small companies, the sectors she likes now, and how she finds the niche firms that could grow into tomorrow's blue chips.


Merryn Somerset Webb: Hello and welcome to the MoneyWeek Magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine. And with me to day I have Anna Macdonald. Now, many of you will have heard Anna speak before. She was an absolute star on the last time I was allowed to do a show at the Edinburgh Fringe. How many times did you come on Anna?

Anna Macdonald: Just a couple, it was great.

Merryn: Just a couple, you were so good I feel like I had you every day. And when I’m next allowed to do a live show, Anna will be on every day. Right Anna?

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Anna: Absolutely. It could be the Merryn and Anna Show.

Merryn: Brilliant. Now, Anna is at Amati Global Investors. She is a fund manager there. They have a variety of funds. The Amati AIM VCT. The AIM IHT Portfolio Service, and the UK Smaller Companies Fund. There is also a Strategic Metals Fund, which we have talked about on this podcast before, with different people.

Anna is not involved in that. But she is a key manager on the other three funds. So Anna, let’s just talk about that in general. Obviously, you are very welcome, you are completely UK Smaller Fund focussed. Tell us about the funds and how they’re run. What’s the method there?

Anna: OK. We, very much run on a team approach. We have four fund managers, and an Analyst. And the fund managers are Paul, who co-founded Amati. And Amati was founded about 11 years ago. And then we also have David Stevenson, Scott McKenzie and I, as fund Mmanagers.

And Gareth Blades is our more than capable analyst. Particularly with the healthcare focus.

Merryn: Gareth, by the way everybody, if you ever see me tweeting or writing anything about anything to do with the medical stuff around COVID, I’ve nicked it all from Gareth.

Anna: Yes, Gareth is fantastic. And he’s a got a great background. Not only is he a Doctor, having done his PhD, at I think, Oxford. But he also has worked at Edinburgh University doing spin outs. And lots and lots of other exciting things. So it was extremely fortunate that he came on board in 2019.

And he has helped us hugely with the burgeoning healthcare sector, but also obviously, has been a key advisor to us over these times of COVID.

Merryn: Yes, I know, it’s been wonderful to have him there as a roadmap.

Anna: Absolutely. And someone who really understands drug approvals, processes and all that kind of thing inside and out. We run about, in total AUM at Amati is over 1.4 billion. The Smaller Companies Fund makes up the big bulk of that at over 1 billion and 70 million.

Merryn: But that’s been... I’m interrupting you, I’m interrupting you every five seconds. I’m sorry.

Anna: That’s OK.

Merryn: You’ve seen tremendous growth recently, hasn’t it? Not just organic growth, because the market has gone its way. But also it’s become a very popular fund.

Anna: Yes, we’ve benefited from a lot of inflows. To give you a bit of flavour, I joined Amati in February 2018. And it was about 105 million there then. So it’s grown a factor of tenfold. The last year we have, as you say, we’ve seen a lot of, growth of about 50% in terms of the valuations. Of the companies that we own.

But also we’ve seen lots of inflows. And that’s wonderful. It’s also very challenging to manage that. In the best interests of both the existing and new clients. But I hope that we’re doing it.

Merryn: I’m sure you are. Also, it’s interesting, because it comes at the same time as one of the things that I read about endlessly. Is the outflows from UK open ended funds in particular? So we write about the huge inflows that have come into the stock market as a whole, during the pandemic.

But those inflows are, in the main, have not been going into the UK market. So it’s interesting to find that there are pockets of the market that are receiving huge inflows.

Anna: Yes, and I think we’re not the only smaller companies fund there is. I think a lot of them have been doing really well, and gathering more assets. I think that smaller companies fund, you would say that I would say this. But I think smaller companies offer something that the, perhaps, the larger UK market doesn’t.

Particularly if you’re looking an index fund, or a close to index fund. If you’re looking at large cap stocks, you might be buying stuff that you don’t really think is going to be going anywhere fast. Whether those are some of the stodgier financials, or oil and gas companies. Or some of the mining companies.

I’m not saying that they won’t have their time in the sun. But they have not been flavours of the month for investors for quite some time.

Merryn: So you’re saying all the growth is at the bottom end?

Anna: Yes, I think you can find selectively, a lot of really growth at the bottom end.

And we don’t just look at the main list. We have around half of the smaller company’s fund. And then obviously all of our VCT, and all of our IHT portfolio service, invested in the alternative investor market, in AIM. And that has really been a success story. Not just for us, but for a lot of investors.

And ten years ago, people were turned off the idea of AIM. They thought it was a bit more cowboy, bit less regulated. But we’re seeing really interesting and exciting companies listing there. So I think that kind of exposure is helping our clients get lots of good growth.

And find those really interesting software, or biotech, and other companies that you just don’t get listed on the main market.

Merryn: All right, well I tell you what Anna, let’s give the elephant in the AIM IHT room, out of the way straight away. And here we are today, you and I, we’re talking on Wednesday 8th September. So the day that all the news is coming out about the new tax. The so-called Social Care Levy.

And that is bringing us to one of the highest levels of tax taken decades in the UK. And we’re now officially a high tax country. Now, one of the biggest tax breaks out there, is the IHQ relief on AIM stocks. And one of the reasons, a lot of people say, why AIM has done so well over the last few years, is exactly because of this exemption.

And if you were to take that away, you’d see a lot of selling in AIM. You’d see valuations a lot lower. Now, if we’re moving into an environment where there’s a lot of talk about raising taxes, and in particularly about, tax the rich. How big is the risk to those portfolio’s into AIM as a whole? Let’s just get that one out of the way.

Anna: There’s no doubt in my mind that if we found out that the BPR, the Business Property Relief, was being taken away from these stocks, that initially that you would see, you’d see a lot of disruption. I think you’d see a lot of stocks, they might be hit. But what we’re trying to find, is companies that actually stack up on valuation point of view, against other stocks.

Whether those are listed on the main market. Or whether they’re listed overseas. And that these stocks are, they deserve their ratings. There are clearly some stocks in the market that do have what we call an IHT premium, built into them. And we try and avoid them.

And a lot of these companies have really grown substantially. So there may be IHT investors involved in Keywords Studios, and Asos and Boohoo. But you’ve got several institutional investors in there too. So I think if the valuation stacks up against other comparatives, then I think you’re probably going to be all right over the long term.

But there would probably be some shorter term disruption. Every time there’s been, these discussions have come up, there’s been these kind of worries, is this relief going to be taken over? Obviously we can’t forecast whether it will or not.

But the mood music has always been quite supportive towards them. I think that when Neil Woodford, and others, were trying to talk about patient capital. And how that should be getting the tax reliefs, and not some of these more established companies. We’ve seen that there are inherent risks in a lot of those earlier stage companies.

We are very keen that the venture capital trust regime also continues. The Amati AIM VCT just did another fund raise, and a subscription, and we are now sitting at 300 million in front of that. But we can really point towards those kind of companies. Yes they are taking risks, and yes investors are getting tax reliefs on these stocks.

Sorry, on the units in the VCT. But they’re also, or the shares of the VCT I should say. But they’re also, these companies are doing important things. They are developing COVID-19 treatments. They are doing things at a very early stage. They are investing in people here.

And I think some of those tax reliefs are very well justified. And these companies are always pretty early stage in the VCT. And they are taking risks, and that’s why you’re getting those rewards. IHT stocks, they’re arguably, I mean stocks in general IHT portfolios, are arguably much better established.

But they’re still have done, they are big employment generators, they’re good success stories. So we hope that those tax reliefs do continue.

Merryn: OK. Well let’s talk about the funds, and the stocks that are chosen to be in the funds. So the main fund has what, sort of 65, 70 odd stocks. How do we choose those?

Anna: We have a growth focus – it’s not completely growth. If you look down our portfolio, even in our Top Ten, we’ve got some stocks that you might consider to be quite cheap. So I could point to Vistry the House Builder, or One Savings Bank. Those are actually both in our Top Five.

But predominantly, we are looking for stocks that we think, we’re finding companies that are going to be the bigger companies of tomorrow. We try and create a portfolio that will perform in a variety of market outcomes. We know that some stocks will perform better, when they’re more cyclical, or less cyclical.

But we’re trying to find smaller companies that have really carved out a niche with a management team that knows that niche. That part of the market inside out, and we’re confident that they are capable of growing their market share, whatever really happens to the broader sector.

And that can be anything, from as diverse as a video gaming company, to a house builder, to a furniture maker. There has been a few companies today reporting. One of them makes spectacles and lenses, and has produced yet another really good set of results.

So we’re trying to find those companies that can really exploit niches, that’s how I put it.

Merryn: There is a phenomenal number of companies in different sectors, for so few of you to cover all at once.

Anna: Well I guess so, but we’re five people. And we think we offer pretty waterfront coverage. We’re all quite experienced.

Merryn: OK, what does that mean? Waterfront coverage?

Anna: Sorry.

Merryn: That’s a real industry phrase that is.

Anna: I’m sorry, yes. That is a bit of weird lingo there. So what we’re saying is that we think we cover all the markets. So we don’t exclude looking at oil and gas companies. We don’t say, oh we’re not into biotech, or weird technologies too difficult or whatever. We do try and cover everything.

We have built, from the very beginning, when Paul started. And I think this is the real strengths, one of the strengths of Amati, is that he built a really good internal platform. So we have something called Connex. And we record every single conversation we have with a company.

Every single conversation we have with an analyst. Our own notes. Our own analysis, our models. Everything that there, in one place. And so we build up a huge corporate memory really, of lots and lots of different companies. And we take lots and lots of meetings.

Whether we’re doing it with companies we know, or companies that we don’t. And yes, over the last 18 months, those meetings have all been virtual. The advantage to that, is that you don’t have to travel, and you can do a lot of meetings. The disadvantage is, that we don’t get to kick the tyres, and see the whites of the eyes of the management.

But I’m delighted to say that I’m going on my first trips next week.

Merryn: You’re not? Where are you going?

Anna: I’m going to London next week. I’m going to see a little company, well, I say little, TinyBuild, which is a company we bought at IPO earlier this year. It’s a computer gaming company. I’ve been challenged to actually play computer games with the CEO, but I’m not going to do that. Given that the last thing I played, I was age 11 and I played a BBC micro game called Chucky Egg.

Merryn: Do you know what we could do Anna? I could come with you and take a video of it, and then we can put it on YouTube and you could be one of those gaming videos that all the kids watch. Just to kind of be amusing.

Anna: And laugh at on TikTok.

Merryn: Laugh at, exactly. It’s a TikTok dream.

Anna: Yes well the CEO of TinyBuild, he’s only 35 and he’s been a professional – or maybe even 32, I can’t quite remember – but he’s been a professional gamer since he was 13. And he has got a very, I think, a pretty innovative model. So they have created, they buy in games that have been developed in Eastern Europe, and Russia.

And they support the makers of these games to make their sequels. And then they call it, acqui-hiring. Which sounds like something to do with water, but it’s not. It’s acquiring the talent, and then hiring them into the business. And then they sell the games.

Which, the cost of production of the game in Eastern Europe is, as you can imagine, is substantially lower than it would be in Silicon Valley. And then they sell these games. And one of the games they’re developing at the moment, is about pigeons taking revenge on humans. And it sounds hilarious.

And I said, why are you doing this? And he said, the pigeons have had enough. And since he told me that, I’ve always thought that that is a great all phrase, the pigeons have had enough.

Merryn: Maybe Alfred Hitchcock, I’m not sure I like it.

Anna: The Birds, exactly. So I’m going to go and meet him. And then I’m also going to see a company called Dianomi. We actually met, hoping that it would be a VCT qualifying stock. But it wasn’t in the end. But we bought it for smaller companies. The smaller companies fund.

Even though it is at the lower end market capitalisation of what we normally look at. To give you a bit of flavour in smaller companies, we’ve got a range of about 50 to 5 billion, in terms of market capitalisation. The median is 540 and Dianomi.

Merryn: 540 million for readers listening, who are not professionals.

Anna: Sorry, 540 million is the median size of company. Now Dianomi is very much at the smaller end of that. And they are.

Merryn: Which makes it what, under 50 million, or around 50 million.

Anna: No, it’s about 75, I’m going to look and see what the current exact market cap is. But what’s interesting, Dianomi is, if you’re a Times reader, and you can tell me if this also happens if you’re a MoneyWeek reader. And you are looking online. I’m afraid I don’t know if it does, if you’re a MoneyWeek.

Whether you have a relationship with Dianomi. So you might be familiar with the click through ads, and articles. Now some of them are very weird. They’re run by these companies like Outbrain. And it will be things like, click on this to find five steps to lose belly fat quickly, or whatever. Or some weird thing about teeth.

Or pensions or something like that. And it’s always pretty low quality advertising. And you’d be surprised how many pretty good publications, have these sort of click bait type ads as click throughs on their websites.

Dianomi aims to do a higher end, and more appropriate advertising. So for example, it will, on the Times website, you could go to the money section and it may have, you’ll see a tiny little thing in the corner, Dianomi. And it will have appropriate advertising content, maybe placed by something.

Maybe, let’s say, it’s on Asian Markets and it may have something from Steward Investors. And you can click through and see a bit of editorial about that. So Dianomi has built together a really clever platform. And so that’s another interesting company that I haven’t had the chance to meet face to face.

So I’m going to be meeting face to face on Wednesday next week, which I’m really looking forward to.

Merryn: Interesting. And if you look the investments that you’ve made recently. So over the last three or four months. Is there any particular sector or area that stands out to you as being the most exciting? The most interesting?

Anna: Over the last three of four months, we haven’t been changing the portfolio hugely. We felt, I suppose, a little bit confused by some of, and I know one shouldn’t say that one’s confused about market performance.

Merryn: We’re all confused Anna.

Anna: Well, I suppose what I’m trying to say is, I don’t think the markets necessarily wrong. I’m just trying to understand it. And what we’ve seen is, it’s been a super challenging environment. Because we have been a bit flummoxed by owning companies that have been doing really well, in terms of trading well.

Getting earnings upgrades. Now, analysts could have put in, may have anticipated these companies would trade well. But what we normally find is, if there is an announcement, and analysts upgrade their numbers, shares normally do pretty well. And that hasn’t been happening.

And we’ve been looking at our Top Ten, Twenty. We’ve had earnings upgrades of 30%, 35%. And seen shares flat, or even down. And that has been pretty confusing. So we have tried to hold our nerve, and not actually change our approach.

Because I think that, we will, one hopes, that these stocks will come good.

Merryn: Can you give us an example of a stock that has seen very impressive growth, but doesn’t appear to be valued to reflect it?

Anna: In fact, today, we have seen, there’s two companies I can talk about. Dunelm, which your readers probably all know quite well. Actually I’m delighted to say, that with their numbers today, the shares have finally moved, and are up about, as I speak, about 12%, 13%.

This to me seems like a very reasonably valued stock that is, can I refer to p/e ratios Merryn?


Merryn: Absolutely you can.

Anna: OK. On a p/e ratio, I think last time I checked, of about 15, 16 times. And it very much tied into consumers feeling good about spending money in the UK having built up quite a lot of excess cash. Some of them have. It’s also, we have been staying at home more, and not travelling.

So we presumably can spend some of our money buying the sheets, and rugs, and home furnishings, and soft furnishings that Dunelm sells. It’s also got excellent new management. And it has also been developing its e-commerce capability a lot.

So you’ve got some really good growth coming from that side of the business as well. So that had been, it just had done nothing. In fact it’d gone backwards over the last three or four months, by about, I think 10%, the share price. Maybe even a little bit more. And today, I’m delighted that it has rebounded.

And so that’s giving me some faith that our original thesis is correct. Another one today which has been fantastic, and I’m delighted that we bought it at the beginning of the year. Is Accesso. Now Accesso is a company that does ticketing and queuing software solutions.

So, we all know, that during COVID, we haven’t been buying tickets to anything. These guys, they do ticketing and queuing systems for amusement parks, and water parks, and ski resorts and things like that. So you can’t imagine a company perhaps more affected than Accesso.

They had also started going into theatre tickets and concert events and things like that. However, that’s started to turn around. And not only that, but we really liked the idea of buying into Accesso, because it’s not just an opening up stock. This is a company with a layer of technology.

Customers are demanding more sophistications. As we’ve all learnt how to use Zoom and Netflix, and E-commerce, and we’ve done all our online shopping. The idea of going to your hotel concierge, if you’re having a staycation. And you want to go on the London Eye.

And he gives you a piece of paper, a paper ticket, and tells you to wander down there. And then you go there and they say, oh well you can come back in two hours. It doesn’t need to be like that. And Accesso were answering that problem. And so they’re steadily building up customers, or clients.

And they said today, that revenues are right back at 2019 levels. To give you a bit of context, Numis, the House Broker, thought that revenues would be 103 million. And in unscheduled trading up to date to day, they say they’re going to be at least 119 million for the year. Which is way better than anyone expected.

And they have results, their results are next week. So to have an unscheduled trading update a week before results, shows how strong. And this is a really pleasant surprise I think. How strong the consumer market has been.

And most of the revenues are in dollars. So if you think, they were saying that Labour Day and the August holiday season in the US was extremely strong. And you want that kind of queuing. Even that kind of technology, you want to be able to manage crowds in your amusement parks and things. That’s really important.

So that, if you do need to do social distancing, or anything, at some time, you would be able to manage that. So we’re delighted, and they’ve been investing a lot in their technology. So hopefully, if revenues continue to build, we’re going to see some really nice returns.

It was loss making last year as you might expect, given what was happening. But we really, really are hoping that we’re going to see some significant growth in earnings. Just to tell you that, Peel Hunt, if I look at what they think. They think that there’s going to be earnings per share are going to go from 12 pence right up to 30 and a half pence, over the next two years.

Merryn: And does that mean that that’s the kind of company you might, I’m guessing, they didn’t pay a dividend before? Is that the kind of company you might now expect to start paying some kind of dividend?

Anna: Accesso, I think we’re still going to see them reinvesting, in building out the software platform. I don’ think they’ve got an interest in a paying a dividend. And that’s certainly not forecast in the near future. But it’s a really very well placed story, and I think management are very strong.

It’s our second, or third, largest holding and I’m catching up with them next week when they publish their numbers.

Merryn: What is your largest holding Anna?

Anna: It is, at the moment, it is, they all change around depending on what we’re seeing on a day-to-day basis. And I brought down my list and now. Yes, One Savings Bank is our largest holding. So that’s a challenger bank. What we say about that, is it’s not one of the big four.

And it specialises in buy-to-let and SME lending. And yes, so it’s had, it’s over 3% of the portfolio. Which is quite a big weighting for us.

Merryn: OK. And still happy with it? Must be.

Anna: Very happy with it. I mean it’s still on a fantastically decent valuation of, I think maybe five times earnings. And it’s built up a great tier one capital ratio. So over, maybe we can see a dividend yield of 4.5%. Perhaps we can see it even increasing after that.

Merryn: And what’s the yield of the fund as a whole. One thing I’m afraid that MoneyWeek readers, and me, are extremely interested in, is dividend yield. So obviously there was a big fall off in dividends, most main market and smaller companies last year. Smaller companies not quite so much, but I guess they had less far to fall, right? But a phenomenal recovery in the first part of this year.

Anna: Yes.

Merryn: What is the fund yield and are you expecting that to rise over time? Where are we with that?

Anna: We are at 1.7%. And I would never think about buying UK small cap growth fund for its yield, really.

Merryn: No.

Anna: So I think.

Merryn: But then that’s better than zero.

Anna: Yes the market average is about 3.8 I think, for our kind of universe. But dividend is not a huge factor for us. With the IHT fund, the dividend actually is more, it’s not that different. But we do like the companies in that, to pay at least a token dividend. We think it’s a pretty good discipline thing to have.

And so that’s something. Obviously the VCT is a little bit, maybe not obviously. The VCT also pays a yield, but it can pay that out of capital as well. It doesn’t just come from the income of the company, the investee companies, that we’re holding. So we do commit to a dividend in that.

Merryn: OK, we’re getting close to the end of our time Anna. But I have to ask you one last question. I have to ask you about the ESG policy. Only because everyone always asks about it. What’s the ESG policy? How does that work for you?

Anna: It is something that we obviously pay attention to. We have, G has been extremely important to us from the very beginning. So we will vote. We don’t outsource any of our voting or anything like that. We look at each individual company. We take them to task on, we read the report and accounts.

We talk to companies about how they are rewarding themselves, and compensation scheme, and all that kind of thing, with a fine tooth comb. We like to see good behaviour. We like companies, and management teams, that own a significant slug of their stock, just have options.

So that’s something that we’re pretty tight on. And we will vote on. On sustainability, a lot of the companies we look at, they have sustainability pretty much as their core. Because you want to be invested in a company that is not only doing the right thing, but it’s able to sustain itself.

And it’s not in a sector that which is pretty challenging. And overly regulated. That’s something we’ll also shy away from. But we do look at, and we do invest in, companies that are maybe misunderstood by the market. We find that if you’ve got a better place, a place that you can extract oil and gas from, which is perhaps less damaging to the environment.

Or less onerous in itself. Or in a geography where we like the political environment. We will invest.

So for example, I took placing in i3 Energy, about four weeks ago. And that was to help them acquire more in Canada. Which is a jurisdiction that we do like. So we will think about that, and the environmental impacts, of where we’re looking. We want to invest in, it’s very important to us that we’re investing in countries that are good to their citizens as well.

Merryn: Anna, that’s brilliant. Thank you very much indeed. That was very informative. And we will hear from you again about all your company visits at the Edinburgh Fringe next year.

Anna: Yes that would be great.

Merryn: When you finally get to join me on stage again, that will be very exciting. Thank you so much for joining us. And anyone who wants to hear more from you, is there a Twitter account for the company?

Anna: Yes, it’s @amatiglobal. And I’m, and when you tweet out the podcast, maybe you can put my handle on as well. [@_Anna_Macdonald]

Merryn: Your handle, I will.

Anna: And yes, we don’t have a TikTok account I’m afraid.

Merryn: Yet. You’ll have one by the end of next week when you’ve finished making your gaming videos. Something to look out for everybody.

Anna: Once you see my gaming videos, yes that will be, yes.

Merryn: It’s a whole new career.

Anna: Absolutely. And then our website [] you’ll find all the information out at Amati Global, at Twitter. So we look forward to you following us there.

Merryn: And if you’d like to hear more from MoneyWeek, obviously you can go to where you can sign up for our absolutely brilliant daily email, Money Morning, largely written by the brilliant John Stepek, with occasional inventions from our crypto expert, Dominic Frisby.

Also a regular guest on the Edinburgh Fringe Show that didn’t happen this year. If you want to hear more from me, you can come to me on Twitter @merrynsw. Also Instagram, MerrynSW, though you won’t find much of interest to do with finance there.

And finally, do leave a review for the podcast at your podcast provider of choice and please do make sure it’s a good one. Because it’s the only way of getting good reviews that we are able to continue to get the brilliant standard of guest on that you have heard from recently.

Anna, thank you very much indeed. And we will talk to you all again next week.