The Fund had its worst month since launch in October as concerns over monetary tightening and trade wars caused a sharp market correction. The Fund was particularly badly hit partly due to its heavy weighting in AIM shares with investors perceiving them as being higher risk. The Fund’s AIM weighting is largely driven to get exposure to the structural growth dynamics of technology stocks, which are for the most part listed on the junior market. As managers we assess risk according to the strength of a company’s cashflow, balance sheet and earnings visibility, characteristics we screen for as part of our investment process, not the market its shares trade on. It’s interesting that after the initial indiscriminate sell-off, individual companies like dotDigital and Elektron Technology have rallied on the back of reassuring news-flow. Another notable feature has been a fairly remorseless sell-off of the overseas industrials, as the market frets about the impact of trade tariffs on global industrial production, with stocks like IMI, Morgan Advanced Materials and Elementis falling back to valuations we haven’t seen since the 2014/15 oil price collapse.
Overall, from a trading point of view, we have raised cash from our more highly rated holdings, particularly where they have held up well, exiting the Fund’s relatively small positions in GB Group, RWS and Blancco Technology and top-slicing holdings in Porvair, Alpha FX, Boku, Tatton and Oxford Metrics, to name a few, whilst topping up the likes of Polypipe, Elektron Technology, dotDigital and RPS, which we felt had oversold in the correction.
It’s not clear where the market goes from here and when we’ll see an end to the current levels of volatility. Any resolution of Trump’s trade war with China would provide welcome relief for the overseas industrial segment. Similarly, an acceptable deal on BREXIT would lift the oversold UK domestic segment, which held up relatively well in the recent sell-off, but events over the last few days only serve to prove how difficult it’s going to be to achieve any consensus in Parliament. Against this backdrop, it’s worth reiterating that the Fund continues to focus on cash generative stocks with pricing power and high levels of revenue visibility, with many stocks manifesting structural growth and non-correlated dynamics to GDP. Having been working hard to keep a lid on the Fund’s overall valuation over this summer and post the recent sell-off, the Fund trades on its lowest average forward PER since launch.