Aside from vaccine approvals, December newsflow was dominated by the on-off progress of the UK/EU trade deal negotiations. Having had to extend the timetable, a deal was signed just before the year end, causing a sharp rally in equities at the start of 2021, initially in large caps, having been left behind in 2020, as the UK market was once again seen as being investable. The spotlight has now returned to the pandemic as infection rates pick-up, new strains emerge and lockdown restrictions tighten again. With vaccine programmes now being rolled out, investors seem to be prepared to look through the short-term impact on growth and focus on the prospect of economies normalising in the latter part of the year. Key drivers for the UK economy are expected to be pent up consumer demand, evidenced by the much higher savings ratio during lockdown and the consumer spending bounce we saw at the end of the first lockdown, and fiscal stimulus from higher infrastructure spending.
The cyclical rally, which began with the successful vaccine trial data in November, continued into December. Notwithstanding its Growth bias, the Fund managed to keep pace with the strong showing by its IA UK All Companies benchmark thanks in part to an agreed takeover for IMIMobile and improved takeover offer for Codemasters. Other significant contributors included Ideagen and Inspecs, both on the back of a well-received acquisitions, and Volution, a building materials business, which rose strongly after a positive trading update. The only material detractor to returns was Shield Therapeutics, which has so far failed to find a US partner for its iron deficiency treatment.
We participated in a number of IPOs in December, most notably Conduit, a new re-insurance vehicle staffed by an experienced team of underwriters which raised $1bn of equity to take advantage of the hardening rates environment, and Bytes, a leading UK software reseller. We also bought back into Redcentric, an IT network and managed service provider, which we owned briefly after the launch of the Fund, where new management have resolved legacy issues resulting from the merger of several businesses. On the sell side, the Fund’s main activity was reducing its Weir holding on valuation grounds after a strong share price run.
Looking forwards, there are definite signs of a rotation out of highly rated growth stocks into cheaper cyclicals, which may make it harder for the Fund with its Growth bias to outperform in the immediate future. However, as managers we have always been cognisant of valuation and have been trimming out more highly rated positions for some time, to the extent that our technology exposure is at its lowest percentage since launch. We would use any meaningful setback in ratings to rebuild this exposure.