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Market Commentary - March 2018

Posted by David Stevenson on 26/Apr/2018

A recent headline states that up to a third of young people face living in rented accommodation for their entire lives. This was prompted by a report from the Resolution Foundation which suggested that 40% of “millenials”, loosely defined as those born between the early 1980s and early 1990s, were living in rented housing at the age of 30. That’s twice as many as those born between the 1960s and the 1980s. The catalysts behind this are likely to be diverse, encompassing the lack of affordability of house prices in many UK cities, rising levels of university and personal debt acting as a headwind, and a secular and cultural shift towards “generation rent”. Since this age group comprises an important political demographic, we have seen the Conservative government appearing to downplay home ownership in favour of improved access through increased building of social and affordable housing. The private sector is also reacting, with the number of “buildto-rent” (private rented sector or “PRS”) property completions rising 45% in the last year. This takes the UK combined total for existing, under construction, or planned, build-to-rent properties to c118,000. However, this number is very small in comparison to the total of 5.4 million households renting in the UK today, which accountants PwC predict to rise to over 7 million by 2025.

TB Amati UK Smaller Companies Fund

The portfolio has exposure to this theme through Countryside and Springfield – which are housebuilders also specialising in affordable housing construction and PRS family homes - and Watkin Jones – a student accommodation builder, which is expanding into PRS apartment construction. The fund fell 0.5% in March which compares to a benchmark decline of 1.3%. The strongest contribution came from Bushveld Minerals, which has a controlling stake in one of South Africa’s leading vanadium mines. This metal is a key element in Vanadium Redox Flow Batteries, which are the most efficient form of large scale electricity storage, now being adopted by utility companies. The fund took part in a placing during the month to recapitalise Bushveld’s balance sheet and finance future expansion. Other major contributors included global litigation finance provider Burford; IT staffing specialist FDM; and e-learning platform Learning Technologies; each of which announced strong results. Detractors from performance included Diversified Gas & Oil, which saw some profit taking after its recent strong performance; on-line fashion retailer boohoo, under pressure from the negative sentiment environment for the sector; and challenger bank OneSavings, despite announcing positive results. Other notable portfolio activity included new positions following placings in established biotechnology company Oxford BioMedica, which has a maturing drug pipeline based on its Lenti virus technology; and Yu Group, the fast growing UK supplier of gas and electricity to SMEs. Existing holding Restore, the UK office services provider, also raised capital to fund a major acquisition of TNT’s records management subsidiary. Positions in Bioventix, CVS and Card Factory were sold.

Amati VCT & VCT 2

The portfolio has exposure to this theme through Bilby, which provides general building, gas maintenance and electrical services to local authorities and housing associations across London and South-East England, incorporating some of the most under-supplied social housing areas in the UK.

The NAV gained 0.7% in March versus a fall of 2.6% for the comparator index. The major contributors to performance included conference call software developer LoopUp, which announced strong results and first customer wins in Australia, adding to its existing UK and US presence; elearning specialist Learning Technologies, which also announced strong results; computer games publisher Frontier Technologies, which rebounded from recent weakness; apps platform appScatter, which announced its first major partnership since flotation with a leading mobile advertising network; and accounting software specialist FreeAgent, which was the subject of a recommended cash offer by Royal Bank of Scotland Group. The main weakness in the portfolio was home security products developer Sprue Aegis, which announced it had received notification from US-based BRK of an alleged breach of product trademarks under their European Distribution Agreement. Sprue Aegis is taking legal advice on the matter, and whilst BRK had already served notice to terminate the Agreement a year ago, the dispute may result in a provision against the value of the remaining unsold BRK stock. Other detractors included building safety and maintenance services provider PTSG, which fell despite positive results and recently upgraded earnings forecasts; global video game services provider Keywords, which gave back some of its strong gains despite no news flow; and document management software specialist Idox, which weakened after disappointing results. The position in Idox was sold, as was a small holding in discount butchers chain Crawshaw. A new position was taken in Diurnal, a developer of hormone therapeutics to treat rare and chronic endocrine conditions. The company has two mature products, one which has European approval and the other which will have Phase III trial results later this year.