Equities performed very well on the back of positive news around Covid-19 vaccines, which allowed markets to look past the global pandemic with more confidence. Economically sensitive areas of the market outperformed as did many UK assets, including UK equities, which reversed some of the underperformance they suffered versus other regions early on in the pandemic. UK equities responded well to the vaccine news in November and then again to the Brexit trade deal, with domestically focused areas and small and mid (SMID) cap equities materially outperforming. UK inward merger and acquisition activity regained momentum as global dealmaking picked up, with mid caps a particular focus.
The trust gave back some of the outperformance it enjoyed over the previous quarters as many market trends abruptly reversed. There was a rotation away from resilient business which served us very well for most of 2020 (including a number of direct beneficiaries of the Covid-19 pandemic) and towards more economically sensitive (cyclical) parts of the market. These areas stand to benefit once vaccination programmes have been rolled out and economies re-open. Despite the negative impact of this rotation on relative returns over the period, the portfolio still delivered a very strong absolute return.
Certain secular trends, for example online retail and more frequent working from home (WFH), have accelerated as a result of Covid-19. The acceleration of such trends drove very strong performances from holdings such as homewares retailer Dunelm, whose new digital platform performed very well over lockdown. Meanwhile, petcare specialist Pets at Home reported resilient trading, helped by the surge in demand for pets following the shift to working from home and essential retailer status which meant stores could remain open during the crisis. Perhaps unsurprisingly both Dunelm and Pets relinquished some of their year-to-date outperformances over Q4. Both were top 10 contributors for the trust in 2020, with Pets our largest individual contributor, delivering a share price return of more than 50%.
Other detractors over Q4 included not owning European short-haul budget airline easyJet, aerospace business Meggitt, Weir (an engineer exposed to the mining sector) or broadcaster ITV. All of these companies were either directly impacted by lockdowns, or exposed to industries with a high degree of economic sensitivity (such as advertising or mining, say). They all rallied by more than 50% in the period, as news of Covid-19 vaccines developed by Pfizer/BioNTech, Moderna and University of Oxford/AstraZeneca provided light at the end of the tunnel as to when economies may re-open.
It’s of note that many of our resilient holdings and lockdown beneficiaries which performed so well over the first three quarters of 2020 still generated reasonable absolute returns over Q4, including IT infrastructure specialist Computacenter. Meanwhile, our cyclical holdings feature heavily in top contributors, including car retailer Inchcape and housebuilders Vistry and Crest Nicholson. Not owning Egyptian gold miner Centamin was our top individual contributor.
We added to our holding in payments group PayPoint and established a new position in countermeasures and cyber security and intelligence specialist Chemring. We sold our position in bookmaker William Hill after it outperformed due to bid activity, took some profits in Pets at Home and reduced our holding in casual dining specialist The Restaurant Group.
Markets dislike uncertainty and, thankfully, we have a bit of certainty as we push forward into 2021 after an eventful 2020. In addition, we’re reasonably optimistic on the outlook for the UK economy and many of the domestically-focused SMID companies exposed to it, including the beneficiaries of the country’s flourishing digital economy. News that UK gross domestic product (GDP) grew by 15.5% in Q3 2020 has been dismissed by some commentators as merely the product of pent-up demand. However, wages and salaries are higher now than they were in Q4 2019, which shows that government schemes are supporting income (albeit at a cost). Once Covid-19 restrictions are eased we could find the economy quickly comes back to strength, with entrepreneurial and animal spirits unleashed again – see What happens when the party starts back up? The recent pick-up in all variety of M&A activity augers well in this regard. Were we to see a strong economic recovery, we could see plenty of jobs being created and wages rising briskly. In this scenario the tax-take would be expected to rise to help pay down national debt.
Back in March last year when the implications of the pandemic were becoming clear, we kept faith in our homework. We felt the crisis would not fundamentally change the investment outlook for many of the strongest companies, and we continue to believe this. The global financial crisis (GFC) was as traumatic for many mid-cap companies as Covid-19. We anticipate a wobbly V-shaped recovery in terms of a rebound in GDP. Companies will continue to face headwinds caused by this most recent disruptive event. It’s important, however, to keep some investment perspective in what feels like an increasingly short-term world. While the recovery following the GFC felt painfully slow, many mid-caps that had genuine competitive advantages emerged stronger. In hindsight, 2007-09 now appears as a minor blip in the long march higher in their share prices – we believe the same will be evident when looking back in five years’ time. It is too early to tell, but it might also be the case that behaviour around distribution of earnings as dividends might moderate, long term. As a result we could see management teams seeking to increase investment to grow companies. With a cautiously optimistic eye on the UK economy, as investors we continue to primarily focus on seeking out the next mid-cap disruptor, while looking to avoid the next industry to be disrupted.
|Q4/2015 -Q3/2016||Q4/2016 - Q3/2017||Q4/2017 - Q3/2018||Q4/2018 - Q3/2019||Q4/2019 - Q3/2020|
|Net Asset Value||6.5||21.0||3.5||1.8||-8.2|
|FTSE 250 ex Investment Trust TR||8.6||14.2||4.2||0.2||-15.3|
The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Past performance is not a guide to future performance and may not be repeated.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.
The Company will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.
As a result of the fees and finance costs being charged partially to capital, the distributable income of the Company may be higher but there is the potential that performance or capital value may be eroded.
The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.