A more difficult month for the Fund as small and mid cap shares underperformed their larger peers, which were helped by a strong showing from the banks and large energy companies. Concerns around supply chain bottlenecks, labour shortages and inflation unsettled investor confidence at the smaller cap end of the market, where the Fund invests. Indeed, there’s now plenty of anecdotal evidence that these issues have started to put the brakes on the earnings momentum of the more cyclically oriented market sectors. As an example, the biggest detractor to the Fund’s performance in October was IG Design, which fell back sharply after a profits warning caused by its inability to pass hefty freight cost inflation to its North American retail customers. However other poor performers in October didn’t follow the same theme, with SigmaRoc and Big Technologies both giving up some of their recent outperformance in the absence of any newsflow, Eco Animal Health continued to decline after its September profits warning caused by a weak pork market in China, whilst Polarean was hard hit on the news that the FDA had not approved its Xenon gas lung diagnostics technology.
It was an active month from an investment point of view, with 4 new holdings added to the portfolio in October. We started a position in Tate and Lyle following management’s decision to divest control of its commodity primary products business and focus on its more differentiated, higher margin and higher growth food ingredient and sweetener divisions. We also bought Alphawave, an IPO from earlier this year which had performed poorly from a share price perspective, giving the Fund a potentially attractive entry point into this rapidly growing developer of high speed connectivity solutions for microchips. Additionally, the Fund participated in the IPO of Devolver Digital, a leading publisher of Indie video games. Finally, we supported a fund raising by Adriatic Metals to help it finance the development of its low cost Vares silver mine project. On top of these new holdings, we took advantage of relative market weakness to top up a wide number of existing positions on valuation grounds, including Homeserve, Euromoney, RWS, Revolution Beauty, TT Electronics, Vesuvius and Convatec. On the sell side we took profits in some of the Fund’s stronger performers, notably Hotel Chocolat, Clarkson, SThree and Volex, whilst also reducing our exposure to River and Mercantile following the announcement of the disposal of its pensions solutions business. Overall, we were significant net investors over the course of the month as valuations across the Fund and its investable universe came back to what in our view were quite attractive levels, leaving the Fund quite fully invested as we go into the last two months of the year.