April update. A sharp market bounce amid a greatly uncertain backdrop

20th May 2020

These are indeed unusual and unprecedented times. Following the sharpest market falls in history in March, we have seen some recovery in April as markets start to look forward to economies beginning to re-open after lockdown. There is no doubt that lockdown measures will be eased gradually and the recovery will take time. It is too early to determine the extent of the scars on the economy and specific sectors such as tourism, pubs and restaurants that will undoubtedly remain materially below capacity even when they are allowed to re-open. A second wave is a distinct possibility and what the markets fear most. Volatility remains elevated as earnings visibility remains low. Whilst current conditions are unquestionably difficult, they do produce opportunities to add high quality companies to the portfolio trading at multi year lows. We anticipate these companies not only surviving but able to thrive in years to come as the recovery takes centre stage.

We are seeing a very high level of companies wanting to raise capital to strengthen their balance sheets – so far over 40 London listed companies have raised in excess of £3bn. We are selectively participating in those we consider to be the most attractive opportunities, whilst also maintaining a well balanced portfolio across different sectors and market capitalisations. By purchasing shares at the time they are raising fresh capital, we are typically buying in at a discount to the prevailing market price, free of stamp duty and broker commission, coupled with now owning a company that is inherently in a stronger position than it was before the fundraise.

This month Hays, ASOS, Gym Group, Hollywood Bowl, Blue Prism and JD Wetherpoons were added to the portfolio as part of fund raisings.

We added to our existing holdings Essensys, IMImobile and Hargreaves Lansdown.

Team17 was also added as part of a sell down by private equity.

In April, the MFM UK Primary Opportunities fund returned 9.58% compared with 10.49% for the IA UK All Companies sector.

Please be advised that the past is not necessarily a guide to future performance. Investments and the income derived from them can fall as well as rise and the investor may not get back the amount originally invested

Purchases

Hays Recruitment

Hays is a leading multi sector global recruitment company. The shares were acquired as part of a £200m placing (at a 13% discount to the previous night’s closing price) to not only strengthen the balance sheet ahead of recession but also to provide capital to take market share when the recovery comes. It is management’s belief that they will be in a position to increase market share as clients and prospective clients will want to use those firms with the strongest balance sheets, rather than those struggling who they deem may to go out of business.

ASOS

Asos is a leading online clothing retailer and one of the largest companies on the AIM market. The shares had been very weak on concerns over debt levels and trading during lockdown. We purchased the shares as part of a £247m placing to strengthen the balance sheet. The company also updated the market on current trading which is materially ahead of expectations. It appears people continue to buy clothes even whilst in lockdown. The shares are already trading 40% higher than the price we paid and we see ASOS continuing to take market share from an ailing high street.

IMImobile

IMImobile is a communications software provider allowing clients to digitally communicate with customers. Blue chip customers include the NHS whereby text messages are be sent to patients keeping the public up to date with their local healthcare developments – particularly critical during this pandemic. We added to our holding as part of a fundraise to remove the debt from the balance sheet and allow the company to win new contracts.

Essensys

A software platform provider to the owners of flexible workspace operators. We added to our holding as part of a fundraise to not only strengthen the balance sheet but also allow for expansion. We believe the firm is well placed to benefit from the enforced home working brought about as a result of the pandemic. We anticipate companies will increasingly want flexible workspace offices where they can increase or reduce staff numbers in the office rather than sign up to long leases. The shares were first purchased at IPO last year.

Gym Group

Gym Group is the second largest low cost gym operator in the UK. With all its sites currently shut as a result of COVID-19, management felt it prudent to raise £41m in the event their sites remain shut for a considerable period of time. With smaller gym operators running with high levels of debt, there may also be the opportunity to acquire sites from weaker competitors. We view this as an attractive re-entry point for a company that we first purchased at IPO in 2015.

Hollywood Bowl

The UK’s largest ten pin bowling operator and has recently launched three virtual golf sites. With all their sites currently shut, management considered it prudent to strengthen the balance in the event the shutdown goes on for longer than expected. We view this as an attractive entry point to a well run business that increases our exposure to this sector as we already hold Ten Entertainment Group.

Blue Prism

Blue Prism is one of the world’s leading artificial intelligent software providers. It has a blue chip client base that is using AI to perform tasks such as data entry that were previously performed by humans. The company raised £100m to strengthen its balance sheet and provide capital for further growth. Management expect an initial slowdown in new contracts as companies focus on the immediate job in hand of protecting their businesses as a result of the pandemic. In the medium term, they see the potential for an acceleration in demand for their products as companies look to further streamline and reduce costs. We considered this an attractive re-entry point into a fast growing technology company.

Team17

Team17 is a video games developer and one of the AIM market’s strongest performers since IPO in 2018. We acquired the shares at an 8% discount to the previous night’s closing price as part of a placing of private equity stock. We consider it an attractive growth company with a strong range of video game releases that should be relatively unaffected by the pandemic.

JD Wetherspoons

A leading pub operator with 874 sites across the UK. The shares were purchased as part of a £140m placing to strengthen the balance sheet as a result of all its sites being shutdown due to the COVID 19 pandemic. Whilst we accept it will take some time for the pub sector to get back to anything approaching normality, we view JDW as a best in class operator and this was a rare opportunity to acquire this high quality company at an attractive level, and at a 6% discount to the previous night’s closing price.

Hargreaves Lansdown

HL is the largest direct to consumer investment platform allowing retail investors to access share dealing, fund management and financial planning. We added to our holding as part of a £160m sell down by founder Steven Lansdown.

Sales

Wizz Air

Whilst we consider Wizz to be one of the best run airlines and given its low cost base, a survivor. Nevertheless, due to the COVD-19 pandemic, we believe airlines will take a long time to rebuild. We decided to cut our losses as the shares have bounced from recent lows and use the money to invest in more attractive primary opportunities.

Urban Logistics

We sold one of our largest holdings as the shares of this warehouse property company had recovered to close to the level of the recent placing price and NAV. We believe the space remains attractive but view the cash better deployed elsewhere.

Marlowe

We trimmed our holding in this fire safety and water testing company as a result of relative strength in what has been an exceptionally weak market.

FRP Advisory

We locked in some profits by trimming our holding following this insolvency practitioner’s successful IPO which has seen its shares rise over 40%.

GlaxoSmithKline

The holding in this global pharmaceutical business was reduced as a result of recent relative strength and to provide funds for the high number of attractive new primary opportunities. With a strong and stable dividend, it remains a core holding.

British American Tobacco/Imperial Brands

Both tobacco holdings were trimmed following positive trading updates and have outperformed year to date in a falling market, as we would expect from a defensive sector. Both continue to provide valuable dividends to the portfolio and are modestly rated.

Trainline

We trimmed the holding in this market leading transport app on strength with the shares trading back above their IPO price. We anticipate the shares will continue to be volatile with a lack of visibility as to  when public transport may begin to resume to anything like normal. In the long term, we see the company well placed to benefit from people buying tickets in advance and the pandemic may reduce people queuing in train stations in order to purchase tickets and instead using platforms such as Trainline.

 

Cumulative Performance (Total Return %) – April 2020

Fund/Benchmark Name 3M to
30/04/2020
6M to
30/04/2020
Year to 30/04/2020 3 Years to 30/04/2020 5 years to 30/04/2020 Since Inception (28/05/1997)
MFM UK Primary Opportunities P Acc -17.5 -12.5 -12.5 -2.3 21.8 339.0
Quartile Ranking
IA UK All Companies
2 2 2 2 1 1
IA UK All Companies -18.5 -14.6 -14.6 -7.3 6.4 210.6

Source: FE 30/04/2020

Discrete Annual Performance (Total Return %) – April 2020

Fund/Benchmark Name Year to 30/04/2020 Year to 30/04/2019 Year to 30/04/2018 Year to 30/04/2017 Year to 30/04/2016
MFM UK Primary Opportunities P Acc -12.5 3.1 8.3 25.5 -0.6
Quartile Ranking
IA UK All Companies
2 2 2 1 1
IA UK All Companies -14.6 1.2 7.4 18.9 -3.6

Source: FE 30/04/2020
 

The past is not necessarily a guide to future performance. Investments and the income derived from them can fall as well as rise and the investor may not get back the amount originally invested. R.C. Brown and Marlborough are authorised and regulated by the Financial Conduct Authority. Marlborough Fund Manager are the ACD. The Key Investor Information Document and the Full Prospectus can be obtained via www.marlboroughfunds.com or by request at: info@rcbpo.co.uk