14 November 2018
October was a turbulent month, where some of the highest rated UK and global growth stocks saw sharp reversals. As always there are many rationalisations of why the market fell, after the event. One plausible view is that the derating reflects a change in the estimation of the path of interest rates into the future. Rising interest rates impact growth stocks the most, as these stocks tend to discount earnings the furthest out into the future. The US 10 year bond yield rose to a 5 year high in mid-September as strong US data showed inflation rising and wages growing strongly. This may have led to a deeper reassessment that the Federal Reserve might raise interest rates faster and further than expected, thus leading to a more profound repricing of discount rates used in equity valuations in October. Other geo-political issues may also have unnerved investors, as trade tariffs began to bite and Brexit negotiation stalled again. The falls in some growth stocks in our portfolios were exacerbated by the strength of gains over the summer, which encouraged investors to take profits. As always with moments of re-thinking in the market, it is impossible to say when it has run its course. Investors are likely to tread carefully for a while now, but the increased nervousness is offset by some good quality growth stocks appearing to be better value than they have been for a long time.
The fund fell 10.3% in the month, underperforming a benchmark drop of 8.3%. The biggest declines were in the high growth companies in the portfolio – Learning Technologies, Keywords, Accesso and Fevertree. Victoria, the manufacturer and distributer of floor coverings, issued a negative trading update, and fell heavily. Being concerned that the negative trends for their business may continue, and that if they did there could be issues with the balance sheet, we sold the holding. On the positive side Serica Energy rose. Serica is acquiring the Rhum gas field from BP. The field, which produces 5% of UK gas supplies, finally received a waiver from the US authorities to allow it to continue operating after November. The Iranian State Oil company owns 50% of this field, which brought it into the scope of US sanctions on Iran. An escrow arrangement has been established to collect money due to be paid to Iran, which will be paid out only after US sanctions have been lifted. This allows the transaction to complete, which is highly beneficial for Serica and cleared the uncertainty which has overhung it all year. Other risers in a difficult month were Bushveld Energy, the South African vanadium producer, and new holding B&M European Value Retail.
Our strategy through 2018 so far had been to gradually de-emphasise the high growth stocks in the portfolio by not adding to positions as the fund grew. We completed a sale of Blue Prism and Codemasters during the month, and took profits in GB Group, Draper Esprit and Boohoo. We added to holdings in Quixant, IG Group, Oxford Biomedica, and bought a new position in Faroe Petroleum. We took part in a placing for Premier Technical Services Group as they announced another earnings-enhancing acquisition and bought more Forterra, as both offer decent growth at an attractive valuation, continuing our shift of the portfolio towards less premium valued plays.
The fund fell by 15.1% in the month, underperforming a benchmark fall of 10.3% by some margin. The biggest holdings in the portfolio are generally highly rated high growth companies, and these were in the line of fire for the market derating during the month. The most significant fallers were Learning Technologies (which had risen hugely in September), Keywords, Frontier Developments, and Accesso, but all of the top ten holdings were impacted, including the TB Amati UK Smaller Companies Fund. We remain optimistic, however, about the prospects for these companies, from which there was no negative trading news. We remain committed long term investors in these businesses. There was relatively little to offset these falls in the month, with smaller rises only from Bilby, SRT Marine Systems, MyCelx and Ixico, mostly relatively small holdings. No new investments were made over the month.