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Market Commentary - February 2019

Posted by Paul Jourdan on 15/Mar/2019

TB Amati UK Smaller Companies Fund

The fund rose by 0.4% this month, but lagged the benchmark which was up 1.1%. Despite the relatively small movement in value, the tone of the market was consistently firm during February with relatively low levels of volatility, perhaps surprising given the chaotic build up to the Brexit deadline at the end of March and the absence of any clarity over what will happen next. Brexit or no Brexit; deal or no deal: these are large issues about which to remain fundamentally uncertain. On the international stage there is an analogous uncertainty around whether the US-China trade war either escalates or gets resolved. Uncertainty is of course the daily diet of fund managers, and we’re well used to it. But the issue with these specific uncertainties is that we know at some point there will be a political resolution one way or the other, and when this comes, the portfolio decisions optimal for one outcome will be very different from those best suited for the other.

Our strategy therefore, has to be to set aside our feelings about what outcomes we would like to see, which is hard to do, and to position the portfolio to strike a balance between stocks that we think do well in one scenario and those that might do well in the other. This means that some of these decisions may look wrong when the direction of travel becomes clearer. However, we can mitigate this risk by making sure that all the investments are in companies with the resilience to continue to prosper even if conditions get tougher for them.

Acquisitive AIM growth stocks have remained out of favour, and the biggest faller during the month was Accesso, which came out with a disappointing trading statement and news that Tom Burnet, executive chairman, would be retiring, falling by 42%. Accesso’s case was not helped by the fact that its accounts have not provided much detail on divisional trading performance for commercial reasons, so the organic growth rates can only be surmised. However, it remains a leading global business in online ticketing and this should give it a strategic value. On the plus side, Manolete, a recent IPO which finances litigation for companies in liquidation, rose by 60% following a strong trading update and has continued to make further gains in March.

Overall it was a month where domestic UK stocks which had been heavily sold off in December on Brexit worries tended to outperform. We made some purchases on this theme, adding to OneSavings Bank, buying a new holding in Charter Court, which is a similar banking business focused on lending to professional buy-to-let landlords, and adding to Gamma Communications. We also bought a new holding in Intermediate Capital, the mezzanine debt specialist fund management business. We reduced Burford Capital and IG Group, and sold Draper Esprit on concerns about the high valuations of unquoted technology companies.

Amati AIM VCT

The VCT returned -3.4%, which was behind the benchmark return of -0.7%, as growth focused AIM stocks continued to be under pressure, particularly at the smaller end of the market. Whilst the tone of the broad market was consistently firm during February with relatively low levels of volatility, the mood on AIM was more muted. It was notable that stocks which rallied found it hard to hold onto gains. The chaotic build up to the Brexit deadline at the end of March and the absence of any clarity over what will happen next has probably contributed to this. Brexit or no Brexit; deal or no deal: these are large issues about which to remain fundamentally uncertain. On the international stage there is an analogue uncertainty around whether the US-China trade war either escalates or gets resolved. The VCT portfolio, however, is of necessity slow moving and evolves over long periods, so we are not attempting to make tactical adjustments to the portfolio to reflect different outcomes.

Some of the recent fallers in the portfolio continued to rally in February, including LoopUp, provider of next generation telephone conferencing services, Quixant, and Oncimmune. GB Group, provider of online identity verification services globally, also rallied strongly on the back of a large acquisition which strengthens the group’s presence in the US market. Meanwhile, the biggest faller during the month was Accesso, which came out with a disappointing trading statement and news that Tom Burnet, executive chairman, would be retiring, falling by 42%. Accesso’s case was not helped by the fact that its accounts have not provided much detail on divisional trading performance for commercial reasons, so the organic growth rates can only be surmised. However, it remains a leading global business in online ticketing and this should give it a strategic value. The new chairman, Bill Russell, will be non-executive making for a more conventional Board structure, and appears to be a strong candidate for the job. Other fallers included Fusion Antibodies, which was behind on expectations in the second half of 2018, as some orders will slip into the following period, and Hardide, which raised money for expanding and moving its UK operations to a new facility in anticipation of meaningful orders from aerospace customers.

We made a further qualifying investment during the month, adding to our holding in Maxcyte, which has a proprietary electroporation technology (a technique which allows genetic material to be passed into a cell) and whose clients include 20 of the top 25 global pharmaceutical companies.