June was a particularly difficult month for both the Fund and the wider UK equity market, with share prices falling rapidly as investors worried about the implications of rising inflation, the impact on consumer confidence, and the prospect of an economic downturn as we progress into the second half of the year and into 2023.
From an individual stock perspective, Devolver Digital, the video games developer, was the worst detractor to the Fund’s performance, as the shares fell sharply after three of its new games had lukewarm launches. Elsewhere, more cyclical holdings like Tyman, SigmaRoc, Wickes and Synthomer joined the ranks of the Fund’s worst performers, as investors started to fret about the economic outlook, alongside Technology and Media stocks like GB Group, LBG Media, AlphaFX and Alphawave, which continued to de-rate. The only positive contributors of note were Euromoney, which joined the growing list of holdings to be bid for by Private Equity, and Craneware, which rallied from its recent sell-off.
On the dealing front, we continued to raise money by taking profits across a number of the Fund’s less economically correlated stocks like Alliance Pharma, Premier Foods, Restore and Man Group, where valuations have held up well. Additionally, we exited Ideagen on the back of the recommended offer for the business. From a buying perspective, we continued to add to some of our preferred growth names, such as GB Group, Auction Technology and AlphaFX as their shares de-rated, taking advantage of the more attractive valuations on offer. We also added to Tyman, a more cyclically exposed building materials play, with the shares now pricing-in a material deterioration in earnings in our view. Finally, we supported Randall and Quilter as they refinanced the business.
In previous inflationary and recessionary cycles, the likes of which we haven’t seen for some time, equities have tended to suffer a sharp sell-off before corrective action is taken and the economy slows, but have then typically recovered ahead of economic activity. Whilst we probably need to see the highly elevated levels of inflation ameliorate before equities can start to rebound, we feel that equities held across the Fund are attractively priced on a medium to long-term view. With the merits of global lowest cost producer supply chains now being challenged by the need for security of supply (post the pandemic disruption) and the ESG agenda for reduced emissions, near-shoring/re-shoring of production is becoming a growing phenomenon, which may well lead to more elevated levels of long-term inflation than we have seen in the past. In this scenario we believe the Fund’s strategy of investing in growth companies with strong margins, which implies they have pricing power, will stand the Fund in good stead over the longer term, with such assets being the best way of preserving real wealth in a more inflationary environment.