13 February 2020
A cluster of events took some of the wind from the sails of capital markets in January. Globally, a potential military confrontation between the US and Iran was followed by the escalating threat of a coronavirus epidemic in China. Domestically, the government’s stance that the UK would not align with EU rules to secure a free trade agreement, raised fears of a no deal Brexit once again. After the strong gains generated by the UK market in the last quarter of 2019, a pull-back was inevitable, with the weakest segment being mid-cap companies which were the leaders from last year. Investor sentiment now seems finely poised. Ongoing disruption to supply chains, caused by the Chinese economy going offline, will impact global trade in the near term, threatening companies with international earnings. Whilst the domestic picture has been given a “soft” boost by rising household and business confidence surveys, this has still to be verified by hard data, and meantime the Bank of England has reduced its forecast for UK economic growth in 2020 to 0.8%, the slowest since the financial crisis. After a momentum driven environment in 2019, careful stock selection will be required to generate outperformance in the year ahead.
The fund fell 1.1% for the month, compared to a benchmark decline of 2.1%. Strongest performances came from a broad range of companies. Asset manager Liontrust continues to see significant inflows across its funds range, and has added scale with its acquisition of Neptune. International music and audio products supplier Focusrite is also combining organic growth with acquisitions, and its shares continue to be re-rated. Power controls supplier XP Power reported strong order intake, as the global electronics cycle shows signs of recovery. Institutional demand for alternative assets is driving funds growth for Intermediate Capital, which specialises in private equity and debt where transaction activity is considerable. Argentex is a foreign exchange broker to corporates for non-speculative spot and forward trades, where service quality is winning share from traditional banks which still dominate the market. Detractors from performance included oil & gas producers Jadestone and Petrotal, and telecoms network and handset testing specialist Spirent, which saw profit taking after a strong run in their shares. Gaming technology specialist Quixant,and e-banking and payment services provider Equals, were also weak after announcing softer trading than expected. During the month new positions were taken in animal healthcare specialist Dechra Pharmaceuticals, private rented residential property operator Grainger, scientific instrument manufacturer Oxford Instruments, giftware and greetings cards supplier IG Design, and gene therapy technology developer Maxcyte. Holdings in discount retailer B&M, and oil & gas explorer Hurricane Energy, were sold.
The fund performed in line with its benchmark, with no change in net asset value for the month. Strongest performances came from computer games developer and publisher Frontier Developments, which announced strong trading across all of its four franchises over the Christmas period, and in particular the very successful launch of Planet Zoo; enhanced MRI imaging technology developer Polarean, which announced positive results from Phase III lung function clinical trials; corporate learning and talent management specialist, Learning Technologies, which is trading ahead of expectations driven by improving margins and acquisition synergies; precision medicine consultant and data specialist Diaceutics, which is also trading ahead of expectations on client growth and improved margins; and commercial waste-to-jet fuel processor Velocys, which recovered from an overhanging share sale. Detractors from performance included video gaming services provider Keywords Studios, which has since recovered all of the weakness in the month after a positive shareholder presentation in February; US hospital healthcare software provider Craneware, which announced disappointing customer renewals; online women’s fashion retailer Sosandar, which continues to invest heavily in brand awareness; gaming technology specialist Quixant, which announced softer trading; and identity software supplier GB Group, which saw some profit-taking after a strong run. During the month, holdings in life sciences companies Evgen Pharmaand Oncimmune, were sold after unconvincing trial results.