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Market Commentary - April 2020 - TB Amati UK Smaller Companies Fund

Posted by Anna Macdonald on 18/May/2020

The rapid stock market recovery we saw from the middle of March continued into April and became broader based. The TB Amati UK Smaller Companies Fund strongly outperformed in the month, and recovered some of the ground it lost last quarter, rising 19.1% against the benchmark which rose 13.2%. However, the fund is still down 18.1% year to date, against a benchmark decline of 23.8%.

Much is being made of the new ways we might live, work, shop and play as we emerge from the end of the beginning of this pandemic. As Andrew Jones from commercial property company LondonMetric said, the tectonic plates have shifted and won’t return to where they were. But neither are we sure of how far they will move and where they will settle. As analysts, we attempt to quantify where we think sales and earnings numbers will change over the coming months. Downgrades and profit warnings are endemic across nearly all stocks and sectors. Companies that are most exposed to lockdown, such as leisure and retail stocks, have sought to quantify levels of cash burn, balance sheet strength and debt and equity requirements. We’ve been ‘wall-crossed’ on several equity raises, which for the most part we have turned down. Whilst some restrictions look set to be lifted, perhaps the only certainty we have is that we must learn to live in a much less predictable world, at least until the virus is better understood, effective treatments are found, and a vaccine can be successfully developed and globally distributed.

This makes forecasting difficult to an unprecedented extent. It is perhaps why it’s felt simpler for investors to focus on the fairly narrow range of companies that are doing well in the current crisis. Some companies we hold are exposed to the ‘new’ world such as e-commerce stocks like Gear4Music (up 72%) and LoopUp, the conference call service provider (up 78%). Stocks that benefit from old world disruption and upheaval such as Begbies Traynor, and Manolete, litigation specialists, rose 33% and 34% respectively. Healthcare stocks will continue to benefit from increased spend and the spotlight that Covid-19 has shone on them, such as Oxford Biomedica and Clinigen.

The recovery in April did encompass shares in companies that are exposed to more cyclical areas of the economy. Banks, retail, leisure, housebuilders and industrials rose. Why? Perhaps those who had sold short were closing positions. Others are optimistic about a V-shaped recovery and want to own shares that are still well down on post-election January highs. Additionally, investors are aware that the huge levels of government spending will generate inflationary pressures not seen for several years, and therefore the need to invest in ‘real’ assets is increasing.

We reduced cash positions during the month and opened new positions in Diversified Gas and Oil, which we feel will do well in a time of low oil prices. We also bought Spirent as a beneficiary of the mounting pressure on 5G and data services. Caretech, the children’s and adult specialist care provider is decently valued and doing well providing essential services. Our new holding in gold miner Centamin provides a hedge against rising prices. We participated in a placing of Maxcyte shares to fund expansion in much needed cell-based therapies for rare diseases and cancer.