13 August 2021
The themes of recovery and re-opening which have dominated global markets since the vaccine rollout began last November now appear less clear cut. Cyclical stocks rolled over somewhat in July as investors took profits ahead of the summer holiday season. This is despite strong ongoing earnings momentum in the more economically sensitive parts of the global economy. As a result, during the month we saw growth factors show positive relative returns. As is often the case the US technology sector led the charge, with stunning second quarter results posted by the big five – Apple, Amazon, Facebook, Alphabet and Microsoft – who between them now account for more than 20% of the S&P500 index. Developed markets eked out small gains across the board whilst emerging markets saw a sell off, led by China, where governmental crackdowns in sectors such as education, technology and video gaming are now seriously impacting investor confidence.
COVID outbreaks began to rear their ugly head again with upsurges in many parts of Asia, most notably Vietnam, and in the US. These pose further threats to already fragile global supply chains. Indeed, our recent round of company meetings have been dominated by discussions about labour shortages, soaring raw material costs and significant transport disruptions. On a more positive note, demand recovery continues to be very strong across the board, with Europe now catching up with the rest of the world.
Inflation remains a clear and present danger for the remainder of 2021 but recent sharp falls in government bond yields suggest that investors firmly believe this will be a temporary spike. Our own anecdotal evidence from a variety of sectors would suggest otherwise, with labour markets in particular set to remain tight for some time now.
As reported previously, corporate activity has continued in the UK with fresh bids for public companies such as Meggitt, Sumo and Ultra. This is a trend which provides solid support for a market which remains good value, if somewhat lacking in leadership.
The TB Amati Smaller Companies Fund rose by 1.9% over the month, ahead of the benchmark return of 1.0%. Year to date the fund is up 17.1%, which is just slightly behind the Numis Smaller Companies Index plus AIM return of 17.6%.
After a very busy first half July was less frenetic in terms of portfolio activity. We participated in the IPO of Saietta, a business developing electric motors for a wide variety of light vehicle applications including scooters, motorbikes and marine. This is a company which we knew well already, having held it prior to IPO in our VCT portfolio, and we were able to build a meaningful stake in what should be an exciting growth business in the years ahead.
The other new holding introduced was essensys, a provider of specialist software to the flexible office market. The company has raised £30m in a placing to enable them to take advantage of the considerable global opportunities they now have. Their leading cloud software provides real solutions in what will be a rapid growth market, benefitting from the shift towards more hybrid working. The CEO retains a 30% stake and has considerable ambition to turn essensys into a global leader.
Sales were made to fund these new holdings. Jet2 had provided strong returns since purchase but the ongoing COVID-related uncertainties leave future prospects vulnerable. We completed the sale of GB Group and sold a relatively small position in Judges Scientific.
Our key positive contributors came from the higher growth segment of the portfolio. The highlight was the takeover approach for games developer Sumo, which rose by 33%. Whilst we will be sorry to lose such a strong performer the price being paid is a full one and unlikely to be bettered. It was pleasing to see Alphawave IP rise by 24% after our recent purchase and we hope that investors are now beginning to see its potential after some indigestion post IPO. Auction Technology was another strong performer, rising 18% in response to the recent acquisition of LiveAuctioneers and the resulting placing.
The main detractors from performance were Argentex, where results were poor and HeiQ , which continued to drift. We also saw profit taking in stocks exposed to recovery such as Dunelm, XP Power and Victoria Plumbing. We remain confident that this part of the portfolio offers an attractive mix of strong market positions combined with ongoing earnings upgrades.
The Amati AIM VCT enjoyed a positive month in July, rising by 3.1% against a benchmark return of -0.1%. After a very strong year in 2020 the fund is up 9.0% in the year to date, which is just slightly behind the Numis Alternative Markets benchmark return of 9.2%.
Two new investments were made. Northcoders is a provider of specialist IT training, to both novices and junior software engineers. Their students range from people changing careers to others already employed in the IT industry wanting to up-skill. There continues to be an acute shortage of coders, programmers and developers in the UK, with Northcoders also now running government backed apprenticeship courses.
Zenova is a recently listed UK company which has developed new fire safety, thermal insulation and temperature management technologies. Whilst the business is at a fairly early stage the products have the potential to provide extra-ordinary solutions to some very difficult and large scale problems. In addition our holding in Saietta listed successfully on AIM in July, allowing us to add to our investment in this exciting new business. The shares started well and have risen 9% since the IPO.
The positive performance was led by a strong showing from our two gaming businesses, Frontier Developments and Keywords Studios which rose by 15% and 18% respectively, with the bid for Sumo reigniting interest in this high growth sector. Online fashion retailer Sosander rose by 38% after strong final results and a positive trading outlook. Maxcyte was also a highlight with the shares adding 21% in response to a successful NASDAQ listing. Learning Technologies Group was again amongst the leaders, buoyed by a successful placing and acquisition of GP Strategies for $343m. Some profit taking in our largest holding, Polarean Imaging, led to it being the most signficant detractor over the month.