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Market Commentary- UK Small Cap Team, October 2021

Market Commentary- UK Small Cap Team, October 2021

17 November 2021

Market Commentary- UK Small Cap Team, October 2021

Global markets enjoyed a strong recovery in October after a difficult month in September. This was led by the US, with the key indices there all reaching record highs again. The UK market lagged and within the various size indices only the FTSE100 rose, with both the mid and small cap indices falling slightly. 

Against this background it is becoming harder to identify clear sector leadership trends, but investors do seem to be responding to a perception that both interest rates and inflation are on the rise. Large sectors such as oils and banks did well in October.

Despite compelling evidence of increased inflationary pressures, the Bank of England surprised markets by keeping interest rates on hold. However, rate rises do now seem inevitable and severe pressure remains on input costs such as gas, shipping, and food, as well as raw materials such as steel. The ‘winter of discontent’ is now a much-loved narrative for media commentators and shortages of supply and low inventories are likely to persist over the festive period. Wage inflation in particular looks set to be persistently high from here with record numbers of job vacancies and a sharp rise in the minimum wage adding to the pressures. However, on a more positive note, the UK IMS leading indicators covering the broad economy, services, and construction all bounced nicely in October and remain at levels consistent with robust growth in 2022. 

From our discussions with a broad range of companies it appears that the issues they currently face are supply related rather than demand shortfalls. Those businesses with strong market positions are therefore likely to fare well over the longer run, despite some short-term disruptions. For this reason, we continue to focus on companies with strong balance sheets who have scope to grow and take market share should times get tougher. 

UK equities remain modestly priced in an international context and we expect to see ongoing M&A activity both from private equity and corporate buyers, which should provide ongoing support for markets 

TB Amati UK Smaller Companies

The TB Amati Smaller Companies Fund fell by 2.2% over the month, behind the benchmark return of -0.6%. 

October was a fairly quiet month in terms of portfolio activity and no new holdings were added. We continued to build positions in some existing portfolio holdings. These included Amryt, a biopharma business where our confidence in their execution has increased and TT Electronics, an industrial group which trades on a discount to peers and where growth prospects are now improving steadily. In the fund management sector, we added to Polar Capital and this purchase was financed by taking some profit in Liontrust.

We also reduced position sizes in two other strong performers, ATG and Kape. ATG has delivered excellent returns since its IPO earlier in 2021 and we remain committed to it in the long term. In a similar vein Kape has risen sharply since we participated in its recent fund raising and some profit was taken. 

One outright sale was made during the month. Maxcyte has performed strongly for the Fund since purchase but with poor visibility of a significant ramp in sales of its cell therapy technology we felt that the valuation fully reflected its long-term prospects. At the end of the period cash stood at just under 6% of the Fund. 

Our key positive contributors came from a few different sources. Following our recent purchase Atalaya Mining’s copper assets continue to be reappraised by investors and the shares rose by 27%. Having suffered in recent months it was pleasing to see Renalytix recover some poise, with shares in this exciting AI healthcare business rallying by 19%. Other stocks making positive contributions included the healthcare services business Ergomed, Cakebox and Mortgage Advice Bureau 

There were however a few disappointments during October. Sensyne Health fell by 35% on poor final results. In the early part of November, they announced a potential management buyout and we await further developments here. Defence contractor QinetiQ warned on parts of its US products business and fell 16% whilst recent IPO Victorian Plumbing had a stodgy trading update. With a limited free float, the shares were hit hard and fell by 29%. A few of our previously strong performers were also impacted by profit taking including Focusrite, S4 Capital and Dunelm. We remain happy holders of all three businesses. 

Amati AIM VCT

The Amati AIM VCT endured a difficult month in October, falling by 6.7% against a benchmark return of -1.4%. 

The weak performance of Polarean was the defining feature of the month, with the stock then falling by 39% when it received a Complete Response Letter (CRL) rather than an approval from the FDA for its key hyperpolariser drug device system. Whilst there is every indication that the FDA’s outstanding questions can be swiftly addressed, this result came as a surprise both to us and the company and will result in a delay to the commercialisation of the product, likely to be 4 - 8 months. Given the size of the investment this was a major setback for the Trust. We had sold around 1m shares ahead of this announcement simply out of prudence, but this was only a small part of the holding.  However, we remain optimistic about the Polarean’s longer term prospects. There was investor profit taking across several holdings which had previously generated strong returns. These included Tristel (-19%), Maxcyte (-16%) and Learning Technologies (-14%). Saietta, which has almost doubled since its recent IPO, also retrenched.

There were a few positives to report in an otherwise tricky period. Synairgen rose by 34% in response to ongoing progress to phase 3 trials for SNG001 whilst Velocys jumped by 35% as the legislative backdrop in the US has created a more favourable backdrop to financing its sustainable aviation fuel (SAF) plant in the US. Getech was another notable riser with a share price increase of 27%.