The events of the last few days ago made commentary about what happened in November somewhat academic. Suffice it to say the Fund returned 5.7%, outperforming its UK All Companies peer group, in what was a strong market for UK equities. The Fund’s performance was boosted by a take-over bid for Consort Medical, which we had been adding to following recent share price weakness. CentralNic performed strongly on the back of a well-received acquisition and a positive trading update, with Ideagen and Liontrust Asset Management also contributing strongly after positive trading updates. Eco Animal Health was the Fund’s worst performing share after it warned that African Swine Flu had disrupted demand for its lead animal antibiotic in China. Future, the Fund’s largest holding, fell back after a strong period of outperformance following a directors’ share sale. We added two new holdings to the portfolio in November, buying Codemasters, a video games developer, once it had secured the all-important Formula 1 racing franchise in a five year deal, and buying back into Brooks MacDonald in a placing to fund a complementary acquisition.
The emphatic Conservative election victory prompted a sharp market rally, particularly in domestic cyclicals which have underperformed since the BREXIT vote, driven by relief over avoiding a Labour government and greater clarity over the UK’s departure from the EU, which was driving deferral of spending decisions by businesses and consumers. However, the initial market euphoria has already evaporated somewhat, with Sterling giving up some of its early gains, as the short timetable set for trade negotiations revive fears over No-deal. Outside the UK, there are signs of progress in US-China trade talks, driving a rally in global industrials after a torrid period for performance.
From the Fund’s perspective, performance had benefitted post the BREXIT vote in 2016 from its relatively low weighting in domestic cyclicals. We started to gradually redress this position from mid-2019 building up small positions in DFS Furniture and Topps Tiles, buying back into Severfield (UK market leader in structural steel), and starting holdings in SigmaRoc (aggregates) and VP Group (specialist plant hire). Notwithstanding this gentle shift in emphasis, the Fund will always have a stronger bias towards structural growth segments, like technology, which has been the most significant driver of returns since the Fund’s inception. Consequently, if the oversold position of domestic cyclical names continues to correct, then the Fund could well endure a period of relative underperformance, until this revaluation plays out and the long-term growth characteristics of the portfolio reassert themselves again.