23 March 2020
It took until the middle of February for markets to fully react to the spread of Coronavirus around the world. The outbreaks in Northern Italy, Iran and Korea caused alarm. Selling was at first indiscriminate, with global markets falling at the sharpest rate since the Financial Crisis, only a few weeks after reaching all-time highs.
The initial focus was on sectors facing an immediate impact, such as travel, retail and leisure, but the concern quickly widened to any companies with revenues dependent on discretionary spending, particularly those with high fixed costs and debt levels. All operationally and financially geared companies started to come under considerable strain, with investors worried about how resilient they would be if the Coronavirus effects prove to be long lasting and severe.
An additional market headwind was a heavy fall in the oil price, caused by a production dispute between Saudi Arabia and Russia occurring at the same time as a contraction in demand following the virus spread. This significantly impacted shares in oil and gas producers.
Over the month the value of the portfolio fell by -10.8% against a benchmark decline of -9.6%, underperforming by 1.2%.
The major underperformers featured energy companies Petrotal and Jadestone, impacted by the oil price collapse. These holdings were strong performers in 2019. Discretionary spending exposed companies like bowling alley operator Hollywood Bowl and promotional merchandise supplier 4imprint, were also impacted. Both of these holdings have since been sold. Only two stocks registered gains in the month –housing landlord Grainger, which raised funding to accelerate its PRS growth strategy, and student accommodation and Build to Rent contractor Watkin Jones.
New holding Inspecs IPO had a flat debut in a falling market, which is as much as we could hope for. Inspecs designs and manufactures glasses, both private label and for names such as Superdry and Nascar. We took part in a placing by IG Design to finance the purchase of CSS Industries, an underperforming company in the US that dovetails nicely with its existing greetings card and wrapping paper business.
We completed a sale of Spirent Communications. Additionally, we reacted to the oil price fall by selling Block Energy and reducing our holding in Pantheon Resources.
The Amati AIM VCT fell by -8.2% against the benchmark which declined -9.9%, a relative outperformance of 1.7%.
Keywords Studios was the strongest contributor, as computer gaming activity showed a sharp increase around the world caused by population lock-downs. Tristel and Byotrol also responded strongly to the Coronavirus crisis, benefiting from an increased demand for cleansing products across health services. Our larger holdings suffered as part of the widespread weakness in AIM. AB Dynamics, Learning Technologies and Frontier Developments all fell, reversing strong gains over the last few months.
We took part in a fundraising for Eden Research, which has patented technology involving naturally occurring plant oils, called terpenes, which have commercial potential as insecticides and fungicides.
We sold out of our holding in Genedrive, which has suffered product approval delays, and a significant revenue decline following supply issues for its largest customer. We decided we would be unlikely to invest further in the company, and so the decision was taken to sell the position.