UK equities rose over the period. Having contained the first wave of coronavirus (Covid-19), national lockdown measures were eased. Meanwhile, unofficial, high frequency indicators, such as Google mobility data, suggested the economic downturn had passed its worst point. UK small and mid-cap (SMID) equities outperformed the wider UK equity market, reversing some of the underperformance suffered in March as the government locked down activity to prioritise public safety. People were encouraged to return to their place of work where necessary, and a phased reopening of schools and various industry sectors was confirmed. This occurred as the cost of the government programmes to cushion the blow from unemployment and the loss of income due to the lockdown became apparent.
Leading homewares retailer Dunelm was our top individual contributor over the period. Dunelm’s online business was fully operational by the middle of April when it reported online order levels had been significantly higher than prior to Covid-19. The company has invested heavily in its new digital platform and its website was ready for the task – this had already been evidenced ahead of lockdown when the site performed well during the peak Christmas period.
Hobby and crafting business Games Workshop performed very well as it resumed operations much faster than expected and confirmed it was on track for another strong year. The company also made further progress with selectively licencing its intellectual property (IP) by granting Frontier Developments the rights to create a video game based around the popular Warhammer Age of Sigmar tabletop game. Meanwhile, an existing IP agreement with Marvel Entertainment bore its first fruit in the form of a new magazine created around a character from the Warhammer 40,000 game. Under the ownership of Walt Disney Company, Marvel has enjoyed great success commercialising its own IP. Based on this track record we see significant potential for it to create many other quality Warhammer products across a wide range of new media towards making the fantasy world a truly global franchise.
Gaming software group Playtech staged a strong recovery, reversing much of the Q1 share price loses when its Italian retail operations had been forced to close due to Covid-19. Despite ongoing uncertainty around this part of the business, the company revealed that its Tradetech division, through online CFD broker, markets.com, has benefitted from high levels of market volatility. Sentiment towards Playtech was further helped as it gained regulatory approval to enter the US market. Our position in oil exploration and production business Premier Oil bounced back, in line with the sharp recovery in crude oil prices.
On the negative side, a number of positions that had outperformed over Q1 gave up some of their outperformance over Q2, including petcare specialist Pets at Home, defence technology group QinetiQ, instrumentation and controls business Spectris and meat processor Cranswick.
We participated in the c.£130 million placing by veterinary products business Dechra Pharmaceuticals. The funds are in part to pay for previously announced acquisitions and investment and help the company maintain a sufficiently strong balance sheet in the event of further Covid-19 related disruption. Investors took this positively, as they did the £300 million-plus raised by serviced office space specialist IWG, which we also supported.
IWG’s fundraising both reassured the market and underlined that there are opportunities now which did not exist previously in the form of attractively priced deals as competitors struggle. Many companies are adapting to a new normal of a hub-and-spoke way of operating office space (with one central office and several regional ones), and on a more flexible basis, which speaks directly to the IWG offer. We were reassured by founder CEO Mark Dixon's material c.£100 million participation in the fundraising.
We also participated in the c.£95 million raising by Ted Baker at an attractive price and a c.£57 million placing by casual dining specialist The Restaurant Group as it accelerates restructuring plans. It has placed the Chiquito business into administration and, with the help of a CVA, will rapidly close many underperforming sites, including a large portion of the Frankie & Benny’s estate. Meanwhile, some of the Wagamama sites have reopened for takeaway and a new click-and-collect service, where demand appears to have been good.
We established a new holding in animal genetics company Genus where we see good opportunities from its gene editing technology. Having been used to successfully breed virus resistant pigs, the company is in the process of bringing the technology to market. In, the technology could also have environmental benefits should it help address the overuse of medicines and drug resistance in the farming industry.
We also established a new position in early stage investor IP Group. Its investments and venture capital funds offer exposure to many promising new technologies. IP Group collaborates with some of the UK’s leading universities to help commercialise their ideas and has stakes in a number of ventures which have been spun out of these institutions. This includes Oxford Nanopore whose technology originated at the University of Oxford and is being used to sequence DNA. We anticipate good support for UK start-ups with the government offering loans as part of its Future Fund (which have the potential to convert into equity) to help the sector manage with Covid-19 related disruption.
Meanwhile, we added to technology products and services supplier Oxford Instruments which has exposure to a number of potential growth areas including 5G. While Covid-19 has disrupted installations of the company’s scientific cameras and optical microscopy products, demand for certain of its semiconductor solutions increased over the crisis due to supply disruptions elsewhere. Demand for these solutions is being driven by trends towards higher efficiency power devices, improved connectivity and faster communications.
We exited home emergency services company HomeServe and speciality chemicals business Elementis ahead of their respective promotion and relegation to the FTSE 100 and FTSE Small Cap indices in late June. We also sold out of global foodservice company SSP Group which hadperformed but where we believe the implications of Covid-19 may have long-lasting implications for the business model.
We have witnessed some of the most volatile market conditions, in the UK and globally, on record. In January/February, the UK economic environment was riding high with accelerating wages and companies performing or recovering well and we were positioning the portfolio to capture what might be termed the "Boris Bounce". What has happened since has been transformational.
In the early stages of the pandemic, we found ourselves moving from positioning the portfolio to help maximise the benefit of improving economic conditions and certainty, to analysing how much cash companies had remaining and what their survival prospects were. This change occurred largely within one month. In all our time running money, we have never seen something which has affected such a broad swathe of companies and made them realise how inter-related they are; and that is now the big concern, the interrelationship of these companies and how they can get through this crisis. It has also emphasised the virtue of direct engagement with our investee companies to understand how they are reacting and their balance sheet strength. The advent of the virus has really tested companies' ability to adapt. Those with the most sustainable business models and willingness to test and adapt using new technologies or methodologies have performed well.
We have been asked what types of new trends are emerging, and if it will change our investment approach. This leads us to examine our core long term growth opportunity stocks, and whether we believe that the opportunities we saw previously would persist in a post coronavirus world. Whilst we have just over three months' of evidence, we can make the following observations:
- Certain secular trends, for example online retail and more frequent working from home, will have been accelerated. Dunelm (UK's number one homewares retailer), Telecom Plus, Pets at Home, Grainger (high quality private rented accommodation), Safestore (self storage) and Computacenter (IT services and equipment) could benefit. .
- Economic turmoil is likely to lead to a number of opportunistic stock ideas. Companies already undergoing significant restructuring or change may be able to use the environment to speed up their transformations. These are likely to be in categories initially hit hardest by the virus, in leisure or retail. They might be stocks which have fallen out of the FTSE 100 index or which have been promoted from the benchmark – there were some twenty changes to the benchmark in June, underlying what a transformational time this has been.
We then think about what will spark a recovery. For the situation to improve in the UK, we need people to be paid more so they can spend that money. If people are going to be furloughed, taking 10-20% wage cuts, and then some made redundant, what does that mean for a consumer spending recovery over the next 15-18 months, particularly if a second lockdown is deemed necessary later in the year? It's an emotive subject that it's hard to have a real debate on now because of entrenched views, with scientists on the one hand with a range of death rate predictions and economic numbers and companies on the other.
This volatility has led us to reflect on where the market was and where it has come to today and to think about what that means for UK businesses and the overall portfolio. What we are doing is striking a balance between evolution and innovation, between growth and value, between long term and short term. We are achieving this without compromising on strong balance sheets and high quality management teams which combined can help these businesses through the crisis.
In conclusion, we continue to primarily focus the portfolio as we have always done: seeking out the next mid-cap disruptor, while looking to avoid exposure to the next industry to be disrupted.
|Q1/2015 -Q1/2016||Q1/2016 - Q1/2017||Q1/2017 - Q1/2018||Q1/2018 - Q1/2019||Q1/2019 - Q1/2020|
|Net Asset Value||5.4||12.3||9.2||0.7||-25.3|
|FTSE 250 ex Investment Trust TR||2.2||13.6||5.6||-0.9||-21.2|
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.