Review: Amati VCT & Amati VCT 2

This offer seeks to raise £20 million in aggregate for the two Amati VCTs, which predominantly invest in AIM-listed companies. Together, the VCTs have a net asset value of £118 million (24 November 2017).

The VCTs plan to merge and, if this goes ahead, an over-allotment facility of a further £10 million may be used.

Highlights

  • Mature, AIM-focused VCTs
  • Trio of experienced, specialist smaller company fund managers
  • Aims to invest in cash-generative businesses that can self-finance future growth
  • Good dividend track record; seeks to maintain these at 5–6% of NAV (dividends are not guaranteed, past performance is not a guide to the future)
  • Diversified portfolio: 59 and 57 holdings respectively, plus exposure to TB Amati UK Smaller Companies fund
  • No performance fee 
  • Minimum investment £4,000 in one VCT or £5,000 (£2,500 in each) if applying for both

The manager

Amati Global Investors, based in Edinburgh, is a specialist smaller-companies fund manager. It was founded in 2010 as a management buyout of Noble Fund Managers by Dr Paul Jourdan, the current chief executive, and Douglas Lawson. The name Amati is taken from a 16th-century Italian violin-making family, harking back to Dr Jourdan’s first career as a professional violinist, playing for the City of Birmingham Symphony Orchestra. In total Amati manages over £200 million in assets, of which £118 million is in the VCTs.

The fund managers are Paul Jourdan, Douglas Lawson and David Stevenson. All three have over ten years’ experience as fund managers. Dr Jourdan has been a specialist smaller company fund manager since 1998, first at Stewart Ivory (later taken over by First State) and then Noble Fund Managers.

In February 2017, AIM-listed wealth manager Mattioli Woods took a 49 per cent stake in Amati Global Investors. This entitles it to acquire the remaining shares of the company between 2019 and 2021.

The VCTs

Amati VCT (“ATI”) was launched by Dr Jourdan as the First State AIM VCT in 2005. Amati VCT 2 (“AT2”) dates back to 2001 having started life as one of three Singer & Friedlander AIM VCTs which have now been merged into the one company, and the Invesco Perpetual AIM VCT, which Amati took over as fund manager in 2010 and was duly merged in November 2011.

As at 1 Nov 2017 there are 57 investments in Amati VCT and 59 in VCT 2. Although these VCTs are managed separately, they are becoming more aligned and differences are mainly now due to historical investments.

Launched Net asset value NAV per share
Amati VCT plc 2005 £61.0 million 98.63p
Amati VCT 2 plc 2001 £57.8 million 164.38p
Source: Amati Global Investors. Net asset values as at 24 Nov 2017.

The offer and proposed merger

The offer seeks to raise £20 million in aggregate across the two VCTs. The managers are planning to merge the two VCTs. An overallotment facility of £10 million may be called upon if this goes ahead. 

The purpose of the merger is to improve efficiency. Since the two VCTs have been managed along the same lines by the same team for seven years now, the portfolios are becoming more aligned. The managers estimate that a merger should trim 0.25% a year from the ongoing costs, which should ultimately benefit shareholders.

The merger is subject to shareholder approval. The decision to merge had been delayed due to a lack of clarity over VCT legislation concerning tax relief for investors who had sold shares in one of the Amati VCTs and bought shares in the other within six months. This matter was cleared up in the Budget on 22 November 2017 and these investors will not now be affected. 

Target return

The VCTs aim to pay dividends at a level of between 5% and 6% of the year-end net asset value, paid in two six-monthly instalments. Since this target is based on a percentage of the NAV, the level of dividends paid could fluctuate more than VCTs which are targeted on a “pence per share” basis. Dividends are variable and not guaranteed.

Dividend history


Strategy

The Amati VCTs focus on AIM-listed companies. They also make the occasional unquoted investment although at present these constitute less than 2.5% of the portfolio.

According to Mr Stevenson many of the companies raising money on AIM are what he calls “jam tomorrow” opportunities, namely those requiring capital to help develop products and bring them to market. Amati tries to avoid these and instead looks for visible revenues and cash flow, so that the companies have the potential to self-finance future growth. An example of this approach in practice is the recent investment in Byotrol plc (see below).

The managers look for companies with high barriers to entry in their market and a sustainable competitive advantage. They take a traditional “value investment” approach concerning companies in out-of-favour sectors. Ultimately what they are looking for is well-run companies early on in the profitability curve.

Amati will take part in IPOs and placements when they consider the pricing to be competitive; in this way they recently added Escape Hunt (leisure venue operator) and Velocity Composites (supplier of materials to aerospace manufacturers) to the portfolio.

Whilst the VCT itself is not eligible for IHT relief, it is affected by this as profitable AIM-listed companies have the potential to become “IHT-friendly” stocks bought by Inheritance Tax portfolios. Dr Jourdan’s team considers these stocks to be expensive and looks for companies that have the potential to grow into such a position over several years.

VCTs can hold up to 15% of their assets in non-qualifying holdings. The Amati VCTs currently have around 10 per cent of their assets invested in the TB Amati UK Smaller Companies fund, also managed by Dr Jourdan and his team. Exposure to this fund – of which 65% is invested in AIM, mostly AIM 100 stocks – adds extra diversification to the VCTs.

Performance

The Amati VCTs have recently had a period of strong performance – indeed they have been ranked as the best performing AIM VCTs over one year, as ranked by share price total return (source: the AIC). The manager notes the performance of Amati VCT in the first half of 2017 was its strongest since the first half of 2009, when stocks rebounded from the global financial crisis.

Annual performance to 30 September each year

2012–2013 2013–2014 2014–2015 2015–2016 2016–2017
Amati VCT: NAV total return 11.59% 12.78% -1.22% 7.83% 43.99%
Amati VCT 2: NAV total return 21.58% 4.83% 0.59% 12.59% 42.18%
Benchmark* 11.23% -5.87% -3.79% 15.89% 24.79%
Source: Amati Global Investors. NAV total return is Net Asset Value plus dividends. Figures are to 30 September each year. Past performance is not a guide to the future.
* Benchmark is Numis Alternative Markets Total Return Index.

These recent results have been underpinned by sharp increases in the share prices of two portfolio companies in the gaming industry:

  • Keywords Studios, the largest qualifying holding in both VCTs, which provides services to video gaming industry and recently made four acquisitions 
  • Frontier Developments, the video game developer behind the Elite: Dangerous franchise; it has also just been awarded the franchise for Jurassic World Evolution. The company was boosted by the Chinese internet giant Tencent acquiring a 9.9% stake for £17.7m in July 2017. 

Another top-five holding, Tristel, which specialises in infection control products, has also seen its share price rise strongly in 2017 based on better-than-expected trading and the achievement of regulatory approval in the US. 

These outliers give some context to the recent surge in performance. Mr Stevenson says that one aspect that has set Amati apart from its VCT peers is a willingness to run with its winners for longer.

Portfolio

The Amati VCTs have seen increasing concentration of assets in the top ten qualifying holdings; this process has accelerated over the last six months, despite the managers trimming some of the largest holdings to take profits.

All of the top ten qualifying holdings across both VCTs are now above £100 million market capitalisation; three are over £400m. 

Over the most recent half-year periods, the two VCTs have invested £5 million in qualifying investments, five of which were in new holdings. Lately the VCTs have sought increased exposure to the healthcare, biotech and pharma sectors, as demonstrated by recent investors such Faron Pharmaceuticals (developing a treatment for Acute Respiratory Distress Syndrome) and MaxCyte (a medical devices company focused on cell therapy).

Holding Description Year first invested Cost (£'000) Valuation (£'000) Market capitalisation
TB Amati UK Smaller Companies Fund OEIC n/a 6,147 10,087 n/a
Keywords Studios plc Video gaming technical services 2013 843 8,704 £796m
Frontier Developments plc Video games developer 2013 1,037 8,291 £408m
Quixant plc Video gaming hardware 2013 804 7,381 £281m
Tristel plc Hygiene products 2009 982 5,188 £133m
Idox plc Public sector software 2007 538 4,362 £248m
GB Group plc Identity data services 2011 461 4,251 £587m
Ideagen plc Risk & compliance software 2012 1,061 4,101 £180m
AB Dynamics plc Motor vehicle testing systems 2013 563 3,858 £111m
Learning Technologies Group plc Distance learning services 2015 1,617 3,657 £270m
Accesso Technology Group plc Queueing & ticketing software 2002 221 3,615 £418m
Source: Amati VCTs half-year reports – cost and valuation figures as at 31 Aug 2017 (ATI) and 31 July 2017 (AT2), market capitalisation at 31 Aug 2017. Past performance is not a guide to the future.

Example of a recent investment – Byotrol

Byotrol logo

In September 2017, the Amati VCTs together took a 6.2% stake in Byotrol plc. Byotrol is a sanitizer products company based at Thornton Science Park in Cheshire. It sells into business, consumer, healthcare and animal care sectors. Its core innovation, a disinfection fluid that remains effective after it has dried, was invented in the late 1990s to help a bakery improve its microbe control. The company listed on AIM in July 2005; however, its share price, having peaked at 80p in 2007, had diminished to 3p in 2015 as commercial results regularly undershot expectations and the company was forced to raise money at successively lower valuations.

Amati VCTs had enjoyed growth from a company in a similar sector, Tristel plc, but decided against investing in Byotrol until 2017. According to Dr Jourdan, new management has been turning the business around and there have been several crucial developments: it has developed strong commercial partnerships, it has recently gained FDA approval in the US, and has recently acquired a business that with supply agreements to the NHS, allowing it to sell its alcohol-free hand sanitizers that reduce skin irritation compared to competing alcohol-based products. This brings it in line with Amati’s criteria of having developed a strong market position to fuel its own growth in years to come.

Exit strategy

There is no explicit exit strategy; however, being AIM-listed could provide a natural exit route for many of the stocks held in the portfolio. Note, however, that they could still be hard to sell and should be considered a long term, illiquid investment. Some companies may get taken over, some may move on to the main market of the London Stock Exchange and be easier to sell, others may be of interest to IHT investors. 

Amati tends to look for long-term holdings; average holding period on top ten is in excess of 7 years. Because many of its larger holdings generate dividend payments, there is less pressure to sell these holdings than would be the case with unquoted investments. Dividends, of course, are variable and not guaranteed.

For individual investors, both VCTs aim to offer a share buyback facility. Historic buybacks have tended to be at between 6% and 9% discount to the prevailing NAV per share.

Risks

Please remember capital is at risk. VCTs are high risk investments and are not suitable for everyone. Investors should not invest money they are not prepared to lose. 

As with other AIM-listed VCTs, the net asset value may fluctuate more than with unquoted VCTs. In addition, even though the underlying companies’ shares may have a listing, there is no guarantee of liquidity. The difference between the buying and selling price of AIM-listed companies is often wider than fully listed ones.

The prospect of a change to the Inheritance Tax rules concerning AIM shares could also be a concern. If BPR rules were to change and Inheritance Tax exemptions were to be removed from large AIM-listed companies, demand for these stocks could be reduced and therefore valuations on AIM could suffer. Tax rules can change and tax benefits depend on circumstances.

Fees and deadlines

There is an initial charge of 3%. Applying through Wealth Club provides a saving of 2%, so the net initial charge is just 1 per cent. 

The annual management fee is 1.75%. Total annual costs are capped at 3.5% and have been running around 2.4% in recent years.

There are no performance fees on either VCT – a welcome move in a sector that traditionally has them. Amati may be entitled to deal arrangement and monitoring fees where it makes investments in unquoted companies, although the manager rarely makes such investments.

Unless fully subscribed before these dates, the offer will close on 4 April 2018 (12:00 noon) for investment in 2017/18 and on 31 August 2018 for 2018/19.

Summary

Often considered a ‘boutique’ choice, the Amati VCTs have enjoyed a boost in their profile thanks to the recent performance of some well-chosen investments – although investors should be realistic about future performance following the recent strong run, remembering that past performance is not a guide to the future. 

Dr Jourdan is an experienced fund manager and his team has demonstrated the results of its disciplined approach to stock-picking. The portfolios are well diversified by company size and sector, and exposure to the TB Amati UK Smaller Companies fund adds an extra layer of diversification, although the weight of the top ten holdings and their performance is likely to increasingly influence the performance of these VCTs. 

The anticipated merger of the two VCTs should provide cost savings on what is already a competitive fee base. We like the absence of a performance fee. The fund managers and directors of the VCTs have themselves invested in this year’s offer, increasing their stakes to around 0.66% and 0.9% in the combined VCTs respectively. With the Unicorn, Octopus and Hargreave Hale AIM VCTs currently closed for 2017/18, this the only AIM VCT offer currently available.

Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.

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Amati VCT & Amati VCT 2

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