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

The market remained under pressure in March as growing fears of a trade war took over from the prospect of the Fed tightening as the main threat to business and investor confidence. Domestically, a seeming willingness for compromise in BREXIT negotiations has alleviated some of investors’ worst fears, but set against this we have seen growing weakness in the retail and leisure sectors with a plethora of companies reporting softer trading as consumers rein in their spending, not helped by the inclement weather in the month.

Having held up relatively well at the start of the year, the market volatility took its toll on the Fund, which had a relatively poor performance against its IA UK All Companies benchmark in March, returning -2.9%. The Fund experienced weakness across a broad number of stocks with a handful of our smaller positions experiencing quite sharp sell-offs, most notably Innovaderma, the toiletries business which reported lower than anticipated orders for its Skinny Tan product by Superdrug, and Zytronic and Frontier Smart Technologies, which both reported quite flat starts to their years against strong comparative data. Finally, Greencore continued to experience issues at its US food manufacturing businesses with ongoing problems at its existing sites and delays in winning new business at the recently acquired Peacocks business, frustratingly detracting from its successful UK “food-to-go” offering. With gearing remaining persistently high and no sign of an end to its problems in the USA, we are reviewing the merits of our ongoing involvement.

During the month we added a number of new holdings to the Fund, buying back into Clinigen, the outsourced pharmaceutical service provider, after a period of share price weakness. We started a holding in Chemring, the mid-cap defence business, which specialises in countermeasures, sensors for IED and chemical and biological weapons detection, and specialist ammunitions. After a period of being in the doldrums post the Iraq and Afghan conflicts, new management have focused on improving operational efficiency and cashflow and we feel Chemring is now well-placed to benefit from a pick-up in activity in the light of growing international tension between the superpowers. We also participated in the IPO for JTC, a fast growing Jersey-based provider of corporate, private wealth and alternative fund administration services, with many similarities to Sanne (which we like and have owned historically) but on a much lower rating. We exited our holding in Inspired Energy, the SME energy managed service provider, after seeing a strong re-rating in its shares. We also sold out of Dialight, which had proved to be a very disappointing investment in what should have been an excellent growth market of commercial LED lighting for extreme environments, as management badly mishandled a move from in-house to outsourced manufacturing capacity, an ongoing issue, which has undermined the company’s ability to meet demand and market expectations.