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

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

November provided some respite from the sharp sell-off in October with the Fund falling only marginally and outperforming its IA UK All Companies benchmark. The performance was helped by several holdings, in particular Elektron Technology, Hill and Smith and Future, rallying sharply from the October sell-off, on the back of positive trading news. However, December has seen a resumption of the market’s downward trend, as the implications of tariff wars, after only a brief respite, continue to undermine investors’ confidence in global equities, whilst the lack of progress on a BREXIT solution that can make its way through parliament is holding back oversold UK domestic earners. Beneath the headlines of equal concern is the flattening yield curve, usually seen as evidence of a slowing economy and a precursor to recession. This backdrop, coupled with low trading volumes (which tend to accentuate short-term share price movements) and with the market in risk-off mode, has created the perfect storm for UK mid and small caps, with high levels of individual share price volatility on any newsflow set against a fairly remorseless underlying downward trend. From the Fund’s perspective the worst performing holdings have been AIM stocks, not helped by the market’s perception that they’re high risk, and overseas industrials, which are unloved because of fears of the impact of tariffs and an economic slowdown on industrial production. Notwithstanding this, management teams across our portfolio, outside the structurally challenged areas like retail, continue to report robust trading at a time when their shares in our view are already beginning to price in a meaningful slowdown.

On the trading front we continued to trim holdings, which have held up well through the sell-off and on a relative basis were starting to look expensive, like Liontrust and Ashmore. We took advantage of the very strong recovery in Future and Polypipe to trim our positions and to exit our holding in Hill and Smith as in our view it no longer represented good value relative to other industrials. We recycled cash into holdings we felt were looking oversold. In particular, we have taken advantage of recent weakness to build larger holdings in some of our favourite tech growth investments, like dotDigital and Quixant, which pre the sell-off been looking quite fully valued.