Market Commentary - July 2018
Posted by Anna Wilson on 15/Aug/2018
The aim of the ‘Markets in Financial Instruments Directive II’, aka MiFID II, was to further increase transparency and harmonise regulation across the European Union’s financial markets. This is a laudable aspiration, but as with so many broad brush pieces of legislation, there are several unintended consequences. Many of these are now coming to light since MiFID II came into force in January. An article in the Financial Times on 30 July highlighted concerns on the fallout from the ‘unbundling’ of research payments from overall broker commission fees. The separation of payments for research and payments for the execution of trades has encouraged fund managers to reduce their research budgets. Whilst many of the FTSE100 stocks are still well covered (Glaxo has 27 analysts according to FactSet and HSBC has 24) the coverage of FTSE250 and Smaller Cap stocks is falling. This means that these stocks receive less attention – and this is a double edged sword. The advantage is that under-researched stocks can offer up opportunity for those willing to do the work. What the 27th analyst might be able to tell you that’s new on Glaxo is minimal – indeed 16 of the analysts have a ‘HOLD’ on the stock, and there are no ‘SELL’ ratings. Discrepancies in valuations and estimates are more likely to occur in stocks that are not so well known. Companies who value the price and liquidity of their shares in the secondary market are starting to adapt to these changes. A broker I spoke to said he is receiving inbound calls now (which is quite a shift) from companies that want to explore the idea of having a ‘joint broker’ - often a large investment bank together with a mid-tier institution to ensure greater potential investor coverage. Some companies are also commissioning research from independent houses. The risk to investors in smaller companies is falling liquidity, at least in this interim ‘shakeout’ period as investors, brokers and companies find their way in the post MiFID II world. Some shares on AIM have trading volumes tracking 25% below last year’s levels. The FT writes that ‘annual trading volumes of companies… with a market capitalisation of between £600m and £5bn – many of which are constituents of the FTSE250 index – fell 9.8% between January to the end of June on a 12 month rolling basis.’ We believe having good relationships with smaller company brokers, as well as carefully managing position sizes, will remain important in order to manage lower trading volumes.
TB Amati UK Smaller Companies Fund
The fund returned 0.81% in July, against a benchmark return of 0.25%. Year to date the fund has delivered a return of 12.54% against a flat benchmark (-0.16%). DotDigital recovered sharply after a reassuring trading statement. Two things had worried the market – GDPR and the acquisition of Magento, one of their major partners, by Adobe. Much as our inboxes seem to have recovered to normal levels of company marketing emails, so DotDigital has not seen any impact on its ‘Dotmailer’ product used by their small and medium size clients. Their partnership with Magento seems similarly unaffected and has in fact been renewed for a further two years – Adobe’s focus is much more on Enterprise (large company) solutions. Draper Esprit continued to rise. Numis Securities held its inaugural T500 conference, showcasing some of the UK’s large, innovative, privately held companies. Draper Esprit has been an early investor in several of them – from Push Doctor to Revolut – and the Numis showcase certainly illustrated the potential of these names. Weakness persisted in Smart Metering Systems as the slow rollout received further attention in the press. We opened new positions in Duke Royalty and Nucleus Financial at IPO.
Amati AIM VCT
The Trust has had a difficult month, underperforming its benchmark by 2.22%. The value fell by 0.97% against a positive return of 1.25% for the Numis Alternative Markets index. This was principally driven by some of our larger holdings – Frontier Developments, Learning Technologies Group and GB Group - giving up ground after a strong first half. However, our holding in other established names such as Accesso and FairFX were strong positive contributors.Water Intelligence rose just shy of 30% as investors responded positively to a good trading statement and the announcement of an exclusive development agreement with Reece Innovation to develop and manufacture new devices that assess the conditions of sewer pipes and identify blockages with increasing precision. We have bought a new position in Creo Medical Group. This floated in December 2016 and raised a further £48.5m this month. Creo’s lead product is known as the Speedboat RS2, which allows for non-invasive bowel surgery by endoscopy to remove small lesions – replacing high risk, high cost major surgery with a simple outpatient procedure. What is most exciting is the potential to adapt their technology to be able to treat lung cancers and pancreatic cancers.