Market Commentary – UK Small Cap Team, February 2022

By David Stevenson

If January was a month of valuation reset then February was dominated by a broadly based equity market sell-off following the Russian invasion of Ukraine, with a significant feature being the ongoing relative outperformance of the Numis Large Cap index. Whilst all other market segments, including AIM, suffered declines of around 4% or more, the largest companies produced a broadly flat result. In recent months large caps have now begun to lead the UK market, in stark contrast to the previous  trend of many years. This outperformance has, however, been very concentrated in a few heavyweight sectors such as resources, utilities and financials. This reflects the major economic and political developments of recent months, especially energy price inflation, two UK rate rises, and a global commodities spike under the shadow of Ukrainian disruption and Russian economic sanctions. Having been criticised as a “Jurassic Park” index, UK large caps now offer cheap sector exposures which are currently in international demand. By contrast, the rest of the UK market has borne the brunt of investor risk appetite diminishing in the face of huge uncertainty, with mid and small caps continuing to be steadily derated.

Uncertainty regarding the outcome in Ukraine is likely to remain elevated for some time but we continue to believe that UK equities remain modestly priced in an international context. There are early signs of bid activity re-emerging with both corporates and private equity funds retaining considerable firepower. Whilst we must be mindful of increased economic risks and the impact of persistently high inflation we do now see numerous opportunities to increase our holdings in high quality companies with strong balance sheets at more attractive valuations.

WS Amati UK Smaller Companies

The fund slightly outperformed in February, falling 4.6% against a benchmark loss of 4.9%. This was sufficient to rank it top quartile relative to peers over the month, demonstrating the widespread nature of the market decline. Our positive contributors were dominated by resources, with oil & gas producers I3 Energy, Petrotal and Energean, and metals plays Atalaya Mining and Trident Royalties, all registering positive gains in a weak market. Amongst other contributors were specialist drug manufacturer, Indivior, whose shares rose sharply in response to strong full year results; vanadium battery developer, Invinity, which announced encouraging project news from within its utility-scale pipeline; textiles innovator, HeiQ, on its partnering with Hugo Boss and Lycra for the development of a cellulose yarn to replace polyester and nylon; defence technology and services provider, QinetiQ, responding to the Ukrainian conflict; and care services operator, Caretech, which has now been the subject of a tentative bid approach in early March. Underperformers in the sell-off were spread across a range of sectors, with no specific newsflow involved. The fund was particularly impacted by weakness from its bigger holdings in buy-to-let mortgage provider, OSB, household utility service supplier Homeserve, and industrial components distributor Electrocomponents. At the bottom end of the portfolio home credit provider, Morses Club, fell sharply after a profit warning and the departure of its chief executive.

New positions were taken in publishing and advertising group Future, and oil & gas producer Serica. Future has achieved significant long term growth from both organic and acquisitive sources. The migration from print to digital was boosted by the pandemic and is now driving margin uplift. The shares have underperformed since the start of the year with no change to earnings prospects, and this created an attractive entry point. Serica owns 5% of the UK’s gas supply, in assets situated east of Shetland which it acquired from BP a few years ago. It is also drilling a gas exploration prospect in the same area which could double its reserves. The shares were very cheap considering the cashflow generated by current energy prices, and they have performed strongly since our initial investment. In terms of disposals we completed the sale of our position in audio equipment supplier Focusrite.


The fund experienced a difficult month with appetite for early-stage AIM stocks particularly impacted by the risk-off environment. Compared to a benchmark decline of 4.7%, the fund fell 8.8%. VCT investments are undertaken with a long term perspective, allowing time for business models to mature, so an abrupt deterioration in market momentum and confidence tends to have a negative impact. Importantly, nearly all stocks which were major underperformers in the month did not do so as a consequence of trading disappointment. Examples include automotive testing and simulation technology specialist AB Dynamics, compliance software supplier Ideagen, electric motor developer Sietta, digital identity and location technology provider GB Group, and medical imaging technology company Polarean. All of these are amongst the biggest positions in the fund and so the combined affect was significant. The fund’s largest holding, the TB Amati UK Smaller Companies Fund, also fell sharply with the mid and small cap sell-off, but it relatively outperformed its benchmark. Tristel, the healthcare disinfection supplier, was the only major holding to announce disappointing results, highlighting that hospital demand had not recovered from the pandemic disruption.

Positive contributors at the upper end of the portfolio included talent and e-learning specialist, Learning Technologies; leak detection and remediation solutions provider, Water Intelligence; electronic components manufacturer, Solid State; and virtual queuing and e-commerce platform Accesso. In each case the companies have recently reported positive trading news.

Two new holdings were taken in the month. Clean Power Hydrogen Group (“CPH2”) has developed a membrane-free electrolyser. The co-founder of the business was formerly Chief Technology Officer at ITM Power. Major benefits from having no membrane mean that CPH2’s system is simpler, has high electrical efficiency, a longer lifetime warranty, recyclable components, and lower water usage. This makes it cost-competitive with alternatives. There is a growing interest in the company’s hydrogen technology, with early test orders. Strip Tinning is an established manufacturer of electrical connector products used in automotive glazing, traditionally for heating and lighting applications. A new growth opportunity lies in “smart glass” technology, involving autonomous driving sensors, cameras, opacity controls and heads-up displays. This is a fast growing market driven by vehicle electrification, greater connectivity requirements and virtual reality. Strip Tinning’s existing car manufacturer relationships and market share, puts it in a leading position to participate in this growth.