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Market Commentary - June 2018

Posted by David Stevenson on 23/Jul/2018

Calendar year sector performance paints a confusing picture. Positive returns have come from defensive bolt-holes such as utilities and healthcare, as well as cyclical mainstays like oil & gas and industrials. In part, this reflects the shifting macroeconomic sands. At the start of 2018, the consensus view was for a continuation of synchronised global growth involving the US, Europe & Asia. This has been overtaken more recently by concerns about Chinese policy tightening, disappointing data from the EU, and a substantial threat from escalating trade wars. In terms of global asset allocation, the underweight in defensive sectors, which has persisted more or less since mid 2016, is now showing signs of rapid reversal. At the other end of the spectrum, we have seen a continuation of the supportive environment for smaller companies. Flotations and fundraising activity continues to be buoyant and, calendar year, AIM remains the best performing segment of the UK market by a large margin. Also, the bottom of the small cap index, a previously over-looked segment, has recently been substantially re-rated. Whilst risks of a pull-back are ever present, the underlying earnings growth being reported by many of the companies we are invested in continues to provide support.

TB Amati UK Smaller Companies Fund

The fund rose by 3.2%, compared to a fall of 0.4% for the benchmark. Corporate activity enabled us to increase our holdings in some favoured stocks.Diversified Gas and Oil (DGO) was one of the most significant contributors over the month – we took part in an equity raise as they purchased a network of assets in the Appalachian Basin for $575m. This was financed by equity to the tune of $225m with the remainder in debt and will lead to substantial earnings accretion and means DGO is able to pay one of the highest yields in the sector at over 5%. We continued to build our position in Gym Group by way of a placing of new shares to acquire 13 EasyGym sites, a sign of further consolidation in the low cost gym sector. Gym Group offers exposure to one of the fastest-growing sectors in the fitness market. The company benefits when customers trade down from more expensive health clubs and under-invested local authority provided facilities. We participated in the IPO of Cake Box, a rapidly growing cake company that specialises in egg-free, fresh cream cakes that can be ordered and collected within an hour. New franchise stores are opening at a rate of two a month and they see a substantial further market opportunity.Seeing Machines rose over 58% during the month as the company announced more contract wins for their Driver Monitoring Systems (DMS) technology with automotive manufacturers. Significantly, EU legislation was announced in May that means that carmakers must install DMS able to monitor driver drowsiness in all new cars, vans and lorries after 2020. There are few providers that will be able to meet demand. Indivior continued to be volatile, as Dr Reddy’s announced they would be releasing a generic drug to compete against Suboxone.

Amati AIM VCT

The VCT fell 3% versus a benchmark gain of 0.4%. This was due to some of the strongest risers over the last few months giving back ground, most notably Frontier Developments , which fell by 23% after dramatic rises early in the year. The company gave a positive trading update, saying that Jurassic World Evolution sales will be stronger than market consensus, leading to further upgrades this year and into 2019. We had taken a small amount of profit in the shares during May. GB Group posted double digit gains as a result of strong numbers with good performance across all their segments. The market for ID verification, fraud and risk management services remains structurally underpinned and management are executing their strategy with remarkable consistency. We added two new positions over the month. We participated in a placing by Angle PLC, which raised further funds for their Parsotix device, which is a pioneering technology in cancer research, enabling Circulating Tumour Cells (CTCs) to be filtered from a blood sample as complete living cells which can then be accurately identified. We believe this is likely to be the last funding round before the company reaches profitability, as an FDA trial is underway for Parsotix’s approval and additionally Abbot signed a commercial deal with Angle to combine the capabilities of Parsortix with HER-2 FISH analysis for breast cancer diagnoses, an area in which Abbot is already the market leader. We also participated in the IPO of i-nexus. This is a company that provides software to the largest global companies to help manage the processes of continuous improvement and strategic change. i-nexus’s software enables management to cascade the different tasks and goals that need to be met for specific objectives across the organisation, before monitoring progress on these objectives.