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MI Chelverton UK Equity Growth Fund – Monthly Manager Commentary – January 2020

MI Chelverton UK Equity Growth Fund – Monthly Manager Commentary – January 2020

After the very strong end to 2019 in the wake of the Conservative party election victory, January turned out to be somewhat underwhelming, with investor enthusiasm dampened by the short BREXIT trade deal timetable and the heightened risk of no-deal coming to the fore again. The Fund had an underwhelming month, returning just 0.54%, ahead of its IA All Companies benchmark but roughly in line with small caps, its investment focus, which outperformed.

There were few stand-out performers. Liontrust Asset Management and dotDigital were the best contributors with strong gains following on from positive trading updates in the month. On the negative side, Elementis fell back after a weak trading update and Accesso Technology sold off sharply when its longstanding formal sales process was terminated with no bid being recommended by the board.

With heavy inflows into the Fund after the conclusive election result and the very strong performance seen last year, which had driven up the overall forward valuation on the Fund, we have been active on the dealing front, deploying inflows and engineering more value back into the fund. To this end, we top-sliced several holdings which have performed very strongly and where we felt short-term valuations were getting somewhat stretched, like Keystone Law, IMIMobile and Ideagen. We exited Avon Rubber and Oxford Metrics, two longstanding favourites, which have served the Fund very well, on valuation grounds. We bought more Accesso Technology after its bid talks collapsed as we feel the underlying business case is sound and the shares are undervalued. Likewise, we kept adding to Elementis on weakness. Apart from this we topped up a wide number of holdings where we felt valuations remain relatively attractive and added several new holdings, namely Vitec (professional camera and broadcast accessories), Weir (mining equipment), Next Fifteen (digital marketing consultancy) and River and Mercantile (asset management) on what we regard as relatively attractive valuations.

Looking forwards, the election of a majority Conservative government has removed some of the uncertainty and perceived risks overhanging the domestic economy and provides a clear direction of travel, so that businesses can now plan for the future and make investment decisions that were increasingly being stalled because of central government inertia. Early signs of housing market activity picking up and the likelihood of increased government spending, particularly on infrastructure, have boosted the previously unloved and oversold construction sector. These stocks and ongoing strength in the momentum growth segment have been the main drivers of UK mid and small caps so far this year. On the global front, with trade tensions between the USA and China now easing, the COVID-19 coronavirus outbreak has now emerged as the main threat to global GDP growth, with the extended New Year holiday shut-down and travel restrictions in China already impacting industrial supply chains with possible implications for the supply of consumer durables into the retail market. Hopefully, the disease can be contained with only modest implications for global growth, whilst any general contagion would obviously undermine the wider economy, albeit for a limited period of time.