Bath/Head Office & Unquoted Equity Team:
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MI Chelverton UK Equity Growth Fund – Monthly Manager Commentary – May 2018

MI Chelverton UK Equity Growth Fund – Monthly Manager Commentary – May 2018

The Fund returned 2.15% in May, modestly underperforming its IA UK All Companies sector. Negative newsflow from a number of portfolio companies put a drag on performance. Photo-Me International was the main detractor after it warned of the effect that over-capacity in the Japanese photo booth market was having on profitability. Frontier Smart Technologies, where the Fund only had a small position, fell back sharply as it warned of lower digital radio sales and a slow take up in its smart audio technology by speaker manufacturers. Stride Gaming sold off as it warned of the impact of tightening regulation on the profitability of its online UK bingo operations. Finally Faron Pharmaceuticals, where the Fund again only had a small position, was severely impacted when its main drug for Acute Respiratory Syndrome failed in its Phase 3 trials. On a positive note Elektron Technology and Integrafin moved ahead strongly after reporting solid results. Our best contributor was JTC, a recent IPO, which after a relatively quiet start to its quoted life enjoyed a significant rise as its shares were re-rated.

On the trading front, we sold our Faron Pharmaceuticals holding after the failed Phase 3 trial, which in our view was a binary event. Stride Gaming’s warning prompted us to exit our position in Jackpotjoy, the UK’s leading online bingo operator (crystallising a substantial gain), as we felt it would be impacted by the same regulatory headwinds. We bought a small position in Motif Bio by participating in a fund raising to help finance the commercialisation of its antibiotic Iclaprim after a successful Phase 3 trial. We topped up a wide number of existing holdings, including Frontier Smart where we feel the shares have become oversold after its warning, given its dominant market position in digital radio and voice enabled technology, which we expect to gain traction in time.

Looking forwards whilst global GDP growth, led by the US economy powering ahead, remains strong there are a number of issues to be borne in mind with US rates forecast to see progressive rises from here and the onset of trade wars clouding the outlook for growth. At home, whilst it is not entirely clear to what extent the first quarter slowdown was due to poor weather, anecdotal evidence from management teams suggests they’ve see a pick-up since April. This Q1 slowdown did, however, prompt interest rate rises to be put on hold. Coupled with heightened tensions over BREXIT negotiations, this has led to renewed weakness in Sterling. Whilst this makes our overseas exposure look attractive for the moment, if trade wars turn out to be more than a storm in a teacup and start to weigh on global growth, we may decide to tilt the portfolio more towards less correlated stocks and more structural growth as well as possibly upping the Fund’s exposure to oversold lowly rated domestic cyclicals as they begin to lap weak comparable trading periods.