10 April 2020
March saw the COVID-19 pandemic trigger a market crisis. The starting point had been in mid-February when it became clear that Italy was seeing widespread community transmission, and the UK half-term travellers would be likely to bring this back to the UK in large, untraceable numbers. On 3 March, Prime Minister Boris Johnson said: “Our country remains extremely well prepared . . . We have fantastic testing systems and fantastic surveillance of the spread of the disease”, joking that he was still shaking hands with everyone, including patients in a hospital where COVID sufferers were being treated. How much changes in a month! Sadly it turned out that insufficient preparations had been made before March when the spread of the virus began accelerating across the UK. Five weeks later, the country is ending its third week in lock down, new laws have been passed that give the Government some extraordinary emergency powers, the Treasury is directly intervening with spending on a vast scale to save millions of businesses and individuals from bankruptcy, and the Prime Minister himself is now critically ill and the country is holding its breath hoping that he will pull through. So March has been a steep learning curve for everyone in the country
As lockdowns engulfed most developed economies across the world, so markets became more and more panicky. The reality of shutting down both demand and supply across a vast array of industries hit suddenly, and it was difficult to see how swathes of economic production could avoid being wiped out. The only voice of comfort was the prospect that if Governments shut their economies down, they would somehow also provide a means of life-support in the meantime. The markets hit their lows on 18 March. On the 19March a large package of support measures was promised, the details of which were given by Rishi Sunak, Chancellor of the Exchequer on 20 March, with the promise that the Government would do ‘whatever it takes’. Similar bailouts were appearing internationally and markets began to stabilise and turn around. This was one of the fastest and most volatile market dramas in living memory.
There is a sense that some momentous changes will ensue from the lockdowns and the bailouts. The bailouts represent an experiment akin to “helicopter money”, long theorised, but never carried out in practice. A reconceptualization of the role of the state, and its relation to private business and citizens has taken place inadvertently. The state has acted as the insurer of last resort, just as the central bank acted as the lender of last resort just over a decade ago. Both require the normalisation of quantitative easing. What had been developing over a long period is now formalised. We have been jolted into a new economic landscape, a journey which many would have resisted strongly without this big nudge.
More immediately, the outlook for markets depends upon two critical questions. How long will it take to move first of all beyond the lockdown, and then beyond the pandemic itself? Our belief is that there are reasons to be optimistic. The entire world of medical science now has its collective guns trained on COVID-19. There is about to be an extraordinary level of investment in dealing with every aspect of it. As fund managers we are forced to take a view on what we think the most likely future scenarios are (whilst also realising that we might be wrong). An act of faith is required here in making these estimations, but it seems worth setting them out. We think that by the summer we will be in a position to limit isolation to vulnerable groups, because the healthcare system will be much better equipped to deal with the pandemic, and the number of cases will have receded by then; and by September some huge strides will have been taken towards identifying partial treatments, and possibly even potential cures and vaccines which may be given emergency use authorisations, even though they won’t yet have been proven to normal standards. The race against time is on for medical science like never before. To cite a phrase which is normally used in reference to years: it is easy to over-estimate what can be done in a month, but easy to underestimate what can be done in ten.
Over the month the value of the portfolio fell by 22.1% against a benchmark decline of 23.9%. After falls of around 10% in February this represents the largest drawdown in the value for the fund since 2008. The only risers in the fund were LoopUp, the virtual meetings business, Yourgene, a diagnostics business, and Begbies Traynor, which provides insolvency services. The biggest fallers were amongst financial stocks, natural resources and construction, and many of these stocks now have the greatest potential to bounce back. We exited Hollywood Bowl and 4Imprint fairly early in March, and reduced some other positions exposed to a consumer shut down. We carried a higher than normal level of cash throughout March as a precaution. Then towards the end of March we began adding to positions we felt were oversold, the best example of which is Intermediate Capital Group, whose earnings will be relatively little affected by the crisis, but whose shares had sold off by over 75% from the highs at one point. They have rallied strongly in April. Whilst there are still many significant risks arising from COVID-19 and the economic aftermath, we believe the portfolio holdings are resilient enough to be part of the recovery.
The Amati AIM VCT fell by 13.1%, a significantly smaller fall than that of the Numis Alternative Markets Index which declined by 20.9% in the month. The outperformance was due in part to the portfolio’s overweight exposure to healthcare companies, including two investee companies which specialise in disinfection products (Tristel and Byotrol), two video games companies (Frontier Developments and Keywords) and more generally to companies operating in the knowledge economy which can continue to operate during the lockdown. Very few investee companies have had to cease activities, with many providing protected key functions, some specifically related to tackling COVID-19. For example, Fusion Antibodies, which has world leading expertise in developing humanised antibodies rapidly, is working on a number of important projects in conjunction with partners to find both a vaccine and a cure for COVID-19.
We made four qualifying investments during the month. They were additional to existing holdings, each of which we had been hoping to be able to allocate more capital to, and each of which was able to raise more money that they originally sought, leaving them well funded for the future: Diurnal, a drug development company with two products aimed at treating adrenal insufficiency; Ilika, a leading developer of solid state batteries; and Polarean Imaging, which is commercialising a transformational new lung imaging technology. We also made one investment in a new company, Synairgen, in order to help fund a rapid clinical trial for its lead product (an inhaled form of Interferon Beta) to be used to mitigate the effects of COVID-19. Interferon Beta is used by the body to control immune responses, and it is believed it is lacking in patients more vulnerable to COVID-19. This inhaled form of the drug will deliver it exactly where it is needed, so it seemed compelling to help ensure that this trial could go ahead as quickly as possible.