25 February 2019
The fund rose by 4.3% in January, but lagged the benchmark which was up 5.4%. Where trading statements or company earnings announcements disappointed, the market was unforgiving. There is a particular lack of tolerance for mis-steps and negative news for AIM-listed stocks, with the pool of natural buyers diminished as risk appetite reduces and liquidity is taken off the table.
The fund was impacted by a 64% drop in Gear4Music. Despite posting a 44% increase in sales over the Christmas period, margins were hit and so was the share price. Management succumbed to a competitive environment on the high street, and cut prices which in turn fuelled demand which could not be met from their distribution centre in York. Whilst it is frustrating that demand was not managed more carefully, international growth remains robust and the long term growth story is intact. We increased our holding a touch after the share price fall. Long term gain should beat short term pain.
Quixant’s share price also responded poorly to a trading update which showed almost the reverse issue –management did not want to pursue lower margin business in its Gaming Monitors business, and therefore announced revenues would be around $115m, a cut of $5m to consensus. The strategy had been well flagged, but despite this the shares fell 24%. In this we see opportunity, so added to our position. Since the month end, we visited the management at the ICE Totally Gaming show at Excel and feedback from one major customer showed significant potential for the rollout of their core logic box product
The twists and turns of Brexit have impacted consumer and business confidence, and domestically exposed sectors such as retail, housebuilders and mortgage banks were especially hit in 2018. Some of our holdings have bounced in January, such as the brick-maker Forterra, up 18%, Mortgage Advice Bureau and Springfield Properties rising 12%, and B&M European Value Retailup nearly 17%. Resources stocks have also been strong –new holding Pantheon posted a return of over 50% in January, alongside Eland Oil and Gas and Serica Energy delivering mid-teens rises.
Our recent addition, Spirent, was our top contributor over January, gaining 26%, and the mid-month trading update confirmed that profit for the full year would exceed market expectations. The rollout of 5G is set to generate significant demand for Spirent’s service assurance division and performance testing. We added to our holdings earlier in the month.
Markets are sensitive and volatile, and seem set to remain so in anticipation of an uncertain outcome over Brexit and darker clouds on the economic horizon.
The VCT returned 7.5% against the benchmark up 6.0%. There’s been a pleasing recovery in some stocks that had been hit in the AIM sell-off towards the end of 2018. Craneware and Ideagen both made up lost ground, and the latter announced a small acquisition and strong results. Keywords also recovered a little as analysts became more sanguine about the year ahead. The computer gaming sector, Frontier Developments included, has been under pressure as investors worried about the success of Fortnite leading to game releases being squeezed into a tight and competitive timeframe around the winter season. Additionally, Chinese licensing authorities restricted new releases for much of 2018. They were particularly irked about updates to games being released without prior approval, but the approvals process is now up to date for all new releases and updates. Further positive news is that Steam, and other online platforms, are cutting their fees which should lead to improved profitability for developers (such as Frontier) and further outsourcing work for Keywords.
AB Dynamics has continued to perform. The stock is a beacon against an ever-worsening backdrop of falling automotive sales and investment. AB Dynamics sells to all the major OEMs and is at the forefront of their electric and autonomous vehicle development spending. It seemed prudent however to take some profits given industry-wide pressures and the risk that manufacturers may start to reduce range sizes in the face of new, direct-to-consumer businesses such as Tesla, which sells only two models currently, with a lower price third about to be launched.Water Intelligence rose sharply –over 50% –as investors digested significant contract wins that were awarded towards the end of 2018. Quixant’s shares responded poorly to a trading update when they announced revenues would be around $115m, a cut of $5m to consensus. The strategy had been well flagged, but despite this the shares fell 24%. Since the month end, we visited the management at the ICE Totally Gaming show at Excel and feedback from one major customer showed significant potential for the roll-out of their core logic box product. Markets are sensitive and volatile, and seem set to remain so in anticipation of an uncertain outcome over Brexit and darker clouds on the economic horizon.