David Stevenson - Fund ManagerDavid Stevenson joined Amati in 2012. In 2005 he was a co-founding partner of investment boutique Cartesian Capital, which managed a range of retail and institutional UK equity funds in long only and long/short strategies. Prior to that he was Assistant Director at SVM, where he also managed equity products including the UK Opportunities small/midcap fund which was ranked top decile for the 5 year period from inception to 2005. David started his career at KPMG where he qualified as a Chartered Accountant. He latterly specialised in corporate finance, before moving into private equity with Dunedin Fund Managers. David has co-managed the TB Amati UK Smaller Companies Fund, Amati AIM VCT since 2012 and the Amati AIM IHT Portfolio Service since 2014.
Review of 2018
Posted by David Stevenson on 02/Jan/2019
The headlines from a year ago have a familiar ring to them. In December 2017, the government suffered an embarrassing defeat in a key Brexit vote, which saw Conservative rebel MPs win an amendment limiting the government’s powers to press ahead with a deal without full parliamentary scrutiny. 2018 started with the expectation that it would prove to be a year of politically motivated volatility, and that this might further depress Sterling which would be good for the largest companies in the UK which have a focus on overseas earnings. As a consequence, some observers thought the UK index of the largest 100 companies would register gains in 2018. Another expectation was that after the first UK rate rise for 10 years in November 2017, inflationary pressures would prompt further rises during the year. In the event, we did indeed experience a year of almost unending political turmoil, and Sterling did indeed weaken against the US Dollar (by about 6% to date), but against the Euro it has been more stable (down about 1% to date). Unfortunately this didn’t protect the index of the largest 100 companies which has fallen around 10% thus far, a fairly similar result to mid and small cap stocks which have been dragged down by domestic economic news and sentiment. The UK CPI inflation rate has in fact fallen fairly steadily from its 3.0% starting point to 2.4%, and this, alongside sluggish GDP growth, put a cap on rate rises with only one August increase during the year. Another surprise in 2018 has been the unwinding of the picture of synchronised global economic growth which was much discussed at the beginning of the year. Whilst the US has kept going, aided by Trump’s tax cuts, there has been a softening in China, and also in Europe where Germany in particular has been impacted by slowing global trade caused by tariff tensions. As a consequence, the German stock market has actually underperformed the UK thus far, with other European bourses also weak; China has been in a bear market; and only the US is holding onto some gains.
In terms of the sector mix within the UK stock market, it is unsurprising that domestic cyclical areas such as retailers, construction, property and banks were under pressure during 2018, reflecting economic and Brexit uncertainty. Less expected was weakness in industrials, which were impacted by growing global economic unease; and also the sell-off in software, following the underperformance of US technology stocks in the last quarter. These factors combined to create a situation in which there were relatively few ways in which to protect portfolios from the sell off in stock markets which began in October. In fact, the major outperforming areas in 2018 have been limited to fairly classic defensive sectors such as pharmaceuticals, personal goods and food retailers, which are dominated by large cap stocks. AIM has had a poor 2018, particularly amongst its larger technology stocks which were impacted by the US sell-off.
Despite the pressure on AIM, which represents around 50% of portfolio exposure, the fund slightly outperformed with a decline of 1.6% versus a benchmark drop of 1.8%. Major contributors to this included a number of AIM stocks which shrugged off the sentiment headwind by announcing positive trading news. Vanadium miner, Bushveld, released a quarterly trading update where lower production volumes were mitigated by significantly higher vanadium prices, driven by demand for energy storage batteries. Automotive engineer, AB Dynamics, reported strong final results reflecting the growth in Advanced Driver Assistance System equipment and the development of autonomous vehicles. North Sea oil & gas producer, Serica, announced the satisfaction of US sanction conditions relating to its interest in the Rhum field, which it shares with the Iranian Oil Company. Cake Box, the specialist retailer of cream cakes announced maiden results with UK franchise stores now numbering over 100. The major detractors to performance featured high profile AIM growth stocks such as Accesso and Learning Technologies, as well as Scapa, the global adhesive tapes specialist which experienced downgrades due to the non-cash contract costs of a transfer of R&D and manufacturing assets involving its recent healthcare acquisition, Systagenix. The fund’s position in Fevertree was sold during the month.
At this juncture, it is almost impossible to call 2019, other than to repeat the perceived wisdom with which we started 2018 – that it will be another (“groundhog”) year of politically motivated volatility. But the UK market is unloved, and possibly underowned. Positive political developments and an improved economic scenario could lead to a sharp rebound in share prices and reinvigorate domestic investment and spending by corporates and households. However, to coin a BBC phrase, other types of political development are available!