Market Commentary- UK Small Cap Team, December 2021

13 January 2022

By Dr Gareth Blades

December saw a shift in tone and policy from central banks recognising that they have misjudged the scale and duration of inflationary pressures. The European Central Bank and Federal Reserve scaled back bond-buying programmes, more aggressively in the case of the US Central Bank, coupled with the prospect of three rate rises in 2022. The Bank of England went further and raised rates from 0.1% to 0.25%. Investors quickly made peace with the about-face of the Central Banks and over the month markets managed a traditional “Santa rally”. The S&P index hit its 70th record high of 2021 on Dec 29th.

In the UK, participation in the December rally was broad based across size, sector and style, although the UK remains undervalued and unloved relative to EU and US peers in most sectors. The market rapidly assessed and looked through the Omicron variant risk. This analysis appears heavily weighted to the risk of hospitalisation and death as a proxy for the likelihood of lockdown. This is understandable because this has been the thrust of Government rationale when imposing restrictions. However, business sentiment surveys in the month trended down, as companies raised concerns over difficulties in maintaining normal operations because of staff shortages, and also, a more muted outlook for business investment and recruitment. Early data predict a 0.6% drop in GDP for December of 0.6%.

TB Amati UK Smaller Companies Fund

The fund gained 2.3% in the month, compared to a benchmark rise of 4.5%. The major contributors to performance included Petrotal, the oil and gas development and production company, which reported the resumption of oil deliveries from a previously blockaded field and a strong operational update achieving the goal to produce more than 20,000bopd ahead of time; Ergomed, the specialist clinical CRO for rare disease and cancer, traded up on no news; and Auction Technology Group, the leading online auctioneer, reported full year results ahead of consensus.

The main detractors included Victorian Plumbing, the online kitchen and bathroom fittings supplier, which saw the softer demand flagged at the end of FY21 persist into FY22 leading to downgrades to growth expectations. We added to the position on the share price weakness due to the company’s leading position in its market and potential to gain further market share from lower quality competitors. Oxford Biomedica, the cell and gene therapy manufacturing and services provider, fell in weak month for healthcare generally. We exited this position during the month..

A new position was taken in Halfords, the provider of motoring and cycling products and services. We participated in the placing to fund the acquisition of National, a major seller of tyres in the UK, which will be integrated into Halfords Autocentres and accelerates the motor services strategy. On share price weakness, we continued to add to the Indivior holding. Indivior is a commercial pharma company developing medicines to primarily treat addiction. The lead product, Sublocade, for the treatment of opioid use disorder is expected to achieve blockbuster status mainly driven by the US market that is experience an opioid use epidemic.

Amati AIM VCT

The VCT rose 1.1% in the month, trailing the benchmark gain of 2.7%. The major drivers of performance were Cloudcall, which agreed terms for an all-cash offer with a US based private equity bidder; Ilika, the solid-state battery developer, announced the opening of a new commercial manufacturing site; and GeTech, the NetZero technology provider, announced an agreement to develop a major green hydrogen production, storage and distribution site in Inverness with SGN Commercial. Detractors included Rua Life Sciences, the company reported the need to re-assess and ultimately re-submit their FDA 510k application. Additional human data is likely to be needed to round-out the application.

A new position was taken in Aptamer which listed on AIM in December. Aptamer is a leader in the field of aptamer discovery services and development of aptamer-based reagents. Aptamers are part of a broader group of affinity ligands; biological molecules that bind to other molecules, antibodies are the best-known example. Aptamers are a next generation affinity ligand and offer advantages such as size, cost of manufacture and exquisite binding abilities. The company is revenue generating and operates across custom services, diagnostics and therapeutics,working with 75% of the top 20 pharma companies globally. We were impressed by the company’s internal processes, project success rate and its rapidly expanding business development pipeline. IPO funds will be used to increase headcount, double lab space and further increase automation to dive a ten-fold increase in capacity.