Throughout the month, supply chain issues, labour shortages and rising energy prices all fuelled inflationary expectations whilst at the same time undermining the outlook for growth. This prospect of stagflation spooked investors, which caused the market to stall in September.
From the Fund’s perspective, supply chain issues caused two of our online retail holdings to warn, with both Seraphine (maternity wear) and In The Style (women’s fashion) downgrading profits expectations because of poor stock availability or elevated freight costs. Other poor performers were SigmaRoc, which gave up some of its recent outperformance, Vesuvius, which fell back as investor enthusiasm for industrials waned, and TP ICAP, which declined after reporting weak results. On the positive tack, Accesso Technology continued to rise after positive results and Kistos, the gas producer, rose on the back of a successful well appraisal and the strong gas price.
On the trading front, we continued to build up the Fund’s holding in Man Group, the alternative asset manager, and topped up Euromoney and Essentra on valuation grounds. We supported the IPO of Made Tech, a rapidly growing digital transformation consultancy targeting the massive public sector digitisation opportunity. We also supported a placing by Kape Technologies to fund the accretive acquisition of one of its virtual private network competitors. On the sell side, we banked profits across several our strongest performers most notably Volution, Clarkson and Liontrust Asset Management.
The coming months will be important to see whether supply chain issues and their attendant inflationary pressures ease or whether inflation becomes more endemic. Investor unease has for the moment reduced the appetite for equities. One consequence of this is that the exceptionally busy IPO pipeline has stalled, with several candidates either having to delay or pull their new issues or reduce their price expectations. From the Fund’s perspective, by looking for companies with a competitive advantage as part of our screening process, our investee companies should for the most part be relatively resilient to inflationary pressure and be able to protect their profitability by putting up prices themselves. Obviously, the very highly rated bond proxy stocks will look vulnerable to any pick-up in government bond yields, but as managers we have sought to avoid very highly rated stocks, except those with commensurately high growth rates.