21 April 2021
The recent strong performance by the UK smaller companies universe can be viewed from both a top-down and a bottom-up perspective. Recovery sentiment has taken hold on a global basis, with investors expecting economic growth to rebound significantly over the next two years, driven by a return of consumer and business confidence, plus accommodative government and central bank policies. The UK stock market is seen as a cheap entry point to this, particularly through smaller companies, with valuations still reflecting the impact of Brexit. At the same time, we have also now seen several months of large net upgrades to UK company earnings, representing the longest such run since the recovery period following the 2009 financial crisis. A combination of these macro and micro views, has created a twelve month performance of UK smaller companies which beats most other global asset classes, in turn generating significant inflows for UK funds. Aggregated earnings multiples for calendar year 2022 - hopefully representing a more normalised growth picture - now range from mid-teens for UK medium & small sized companies, to mid-twenties for larger AIM stocks. The ongoing appeal of these multiples, however, is heavily dependent on how the UK and overseas economies eventually emerge from the pandemic environment.
The fund gained 2.3% in the month, compared to a benchmark rise of 4.3%. Market appetite remains tipped towards cyclical recovery stocks, in some cases ahead of earnings upgrades, with less economically sensitive companies lagging even if they continue to show attractive growth. The best performers in the portfolio reflected this pattern, including furniture retailer DFS, IT equipment and services provider Softcat, and leisure technology specialist accesso. Each produced strong trading updates during the month. Other contributors reporting positively, were consumer digital & privacy software provider Kape, kidney disease diagnostics company Renalytix AI, and financials trading platform CMC Markets. Main detractors included oil & gas producers Touchstone, which announced disappointing test results from a Trinidad & Tobago property, and Jadestone, which gave back some recent gains. Electronic component specialist XP Power, also saw some profit taking. During the month, new positions were taken in Energean, a diversified EMEA oil & gas producer and services provider; AdvancedAdvT an acquisition vehicle part owned by software entrepreneur Vin Murria; Trident Royalties, a mining royalty specialist in which the TB Amati Strategic Metals Fund also took an investment; and tinyBuild, a video games developer and publisher which floated during the month. A small position in EKF Diagnostics was sold.
The fund gained 1.6% in the month, compared to a benchmark rise of 1.3%. The best performers were Diurnal, the speciality pharmaceuticals company targeting patients with chronic endocrine diseases, which in the final step before formal approval Chronocort (Efmody) received a positive opinion from the human medicines advisory committee of the European Medicine Agency; Frontier Developments, the video games developer and publisher, which recovered from recent weakness; AB Dynamics, which announced the well received acquisition of an Asian supplier of automotive testing services; and Fusion Antibodies, the contract research organisation (“CRO”) servicing antibody development and production, which bounced on no news. Detractors included a number of higher rated stocks which saw profit taking as investors rotated into economic recovery plays. This included Ilika, the solid-state battery developer; Maxcyte, the provider of cell-engineering platform technologies; and Learning Technologies, the e-learning specialist. Ixico, the neuroscience data analytics company, fell sharply after it announced a key pharma customer had halted recruitment for their Phase III trial of a treatment for Huntington’s disease, which Ixico was providing image analysis for. This is one of the hazards of providing services to clinical trials, and requires Ixico to build up a diverse base of clinical trial contracts, which it has been making good progress with over the last few years as the business has grown.
In a very busy month for deal flow, the fund participated in four placings and an IPO, investing a total of £9m in new qualifying holdings. Existing holdings Cloudcall, the CRM communications software specialist, and Polarean, the medical-imaging technology company, raised funds to support ongoing working capital and business development. Three new holdings were added - Getech, a provider of geoscience software and services, which raised funding to support diversified growth across its hydrogen, oil & gas and mining end markets; Saietta, an unquoted company with a groundbreaking electric motor for light transit vehicles such as motorbikes and small delivery vehicles, which raised pre-IPO funding in preparation for a targeted AIM flotation later this year; and In The Style, an e-commerce womenswear fashion brand using an innovative, “influencer collaborative” model, which floated during the month.