Finely crafted investments



Market Commentary - February 2018

Posted by Paul Jourdan on 20/Mar/2018

The chill winds from the return to volatility in early February didn't develop into a market storm, but rather petered out during the month as markets found a jittery equilibrium in which the heightened sense of nervousness persists. Trying to peer even a little way into the future in the current environment is like trying to stare into a thick fog. It is clear that the era of ultra low interest rates is coming to an end and inflationary pressures are building; how will different industries and different parts of the economy deal with this? The growth in broad money in the UK and other countries is slowing; to what extent will this slow down GDP growth? Political tensions are rising, and this appears to form part of a long term erosion of freedom and democratic practices globally; what is the probability that political developments become the driving force of markets, rather than economic ones? Then of course, there is the "B" word; how bumpy is the road to Brexit, and where does it lead?

Whilst pondering all of these questions, and having arranged to put on an educational event for Cambridge students, I had the pleasure of visiting three remarkable medical technology companies during February, each situated on a different science park around the city. They brought home to me just how far digital technology and scientific discovery has facilitated new paradigms in medicine, and how much expertise is concentrated into centres of excellence in the UK. We have made relatively few investments in the cutting edge of medical science over the last decade, because the time frames are so long, the capital requirements enormous, and the chances of success for small companies generally low. But as some of the core new technologies developed over the last 20 years around the human immune system, cell engineering, and gene editing come to maturity, I have the feeling that this is an area to get more involved in. It is a good example of how each segment of the economy has its own trajectory, and this is one which appears firmly on a rising path.

TB Amati UK Smaller Companies Fund

The fund fell 1.8% in February which compares to a benchmark decline of 3.0%. Amongst the strongest contributions were Diversified Oil & Gas, which completed a major earnings enhancing acquisition during the month, giving us the opportunity to increase our holding; Draper Esprit, the venture capital fund management business; and Keywords Studios, service provider to the video games industry, which issued a positive trading update at the start of the month. The largest negative contribution came from Clinigen, a global medical services company, which reacted negatively to a decline in sales in its smallest division, which took away the near-term potential for upgrades to earnings forecasts. Burford Capital, the litigation finance company, and Quixant, manufacturer and designer of advanced PC based gaming platforms, were also amongst the more significant negative contributors on no particular news; whilst Sanne, outsourced fund administration provider, fell back following downgrades to forecasts due to adverse foreign exchange movements.

The most significant transactions during the month were adding to the position in Diversified Oil & Gas in their fund raising. We also sold the position in Pan African Resources.

Amati VCT & VCT 2

The NAV fell 3.5% (Amati VCT) and 3.1% (Amati VCT 2) in February versus a fall of 2.6% for the comparator index. Against a negative backdrop there a few modest share price rises, the highest of which were from lettings agent Belvoir Lettings and leak detection business Water Intelligence. The biggest positive contribution came from Keywords, which issued a positive trading update at the beginning of the month. The largest negative contributions came, not surprisingly, from some of the largest holdings, Frontier Developments, Quixant and Ideagen Software, and were not related to any adverse announcements or downgraded expectations. Frontier Developments announced interim results which were in line with expectations.

We made one follow-on qualifying investment, adding to the position in Faron Pharma, as it raised further funds to support commercialisation of its lead product in the US, subject to the Phase III data from the ongoing clinical trial of Traumakine being positive. The data readout from this trial should be published by the end of June.

Dr Paul Jourdan