December update – UK market soars on larger than anticipated Tory majority

10th January 2020

We participated in three primary opportunities – we added to our holding in Creo Medical as it raised fresh capital, whilst small caps MJ Hudson and Pebble Group made their market debuts following successful IPO’s. Markets and sterling rallied hard as any concerns over a Corbyn led socialist government were blown away by a sizeable Conservative majority.

In December, the MFM UK Primary Opportunities Fund returned 4.39% compared with 3.32% for the FTSE All Share and 3.79% for the IA UK All Companies Sector.

In what proved a strong finish to the year for global equities, and in particular the UK, as a clear and decisive victory for the Conservative Party was well received by market participants for a number of reasons. Firstly, it removed any prospect, however unlikely, of a socialist Labour government that would not have been well received by the market as taxes on wealth would have risen and swathes of industries such as water, electricity and public transport potentially re-nationalised. Secondly, a large Conservative majority, it is believed, is more likely to agree a trade deal with the EU, and less beholden to the wing of the party that wants a no deal and a clean break from the EU. And thirdly, the avoidance of a hung parliament and what in all likelihood would have seen further parliamentary in fighting over Brexit, means that the UK will now leave the EU, providing companies with some certainty and more able to make investment decisions. A large fiscal stimulus as outlined in the Conservative manifesto is also expected to boost the economy.

2019 was a particularly strong year for the mid cap FTSE 250 as it recovered from an oversold position in 2018 and fears of a no deal subsided.  Small caps lagged mid caps markedly and we anticipate 2020 being a strong year for small caps as investors look to increase exposure to this modestly valued part of the market. Hence we have increased our small cap exposure to near 30% but importantly much of this is among what we term ‘large small caps’ i.e. those with a market capitalisation in excess of £200m, providing sufficient liquidity for us to implement our decision making.

In 2020 we anticipate a considerable increase in the amount of money raised on the UK market, now that greater certainty exists and greater focus on UK equities given their lowly valuation. 2019 saw £15bn raised and we expect this to increase to at least in line with the average of the past decade to over £20bn. IPO’s also saw their lowest level since 2012 and we expect a return of larger IPO’s that were distinctly lacking in 2019. Market conditions in 2020 should provide plenty of fertile primary opportunities for our investors.

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

Creo Medical

We added to our holding in this medical device company following a £50m fund raise in order to provide capital for the development of further endoscopy products and allow for future M&A. We have held the shares since the Company’s IPO in 2016 since when the shares have more than doubled.

Pebble Group

Pebble provides promotional merchandise, creative design and web hosting services to large international companies such as Google and Michelin. We purchased the shares at IPO at what we considered a modest valuation in relation to peers. The shares have already appreciated over 25%.

MJ Hudson

MJ Hudson provides consultancy and business outsourcing services to the asset management industry, focusing on alternative investments such as infrastructure. It also encompasses a corporate law firm that advises on matters including the structuring of funds. We see it benefiting from the growth in assets under management in the alternative investment space. The shares were purchased at IPO where the proceeds will provide capital for expansion and M&A.

 

Sales

Cineworld

The cinema operator has been a disappointing performer since its acquisition of Regal Cinemas in 2018, unaided by a lackluster cinema release schedule. We used a bounce in the shares following a trading statement to sell our holding.

Glencore

The miner and trading company was sold following news that it is facing a probe by the UK serious fraud office. The shares performed poorly in 2019 and with this investigation hanging over the Company, we believe the shares will struggle to make head way.

Prudential/Lloyds

We used a post election rally to trim our holdings as UK financials enjoyed a sharp rally. Both remain core holdings.

Trainline

The shares rallied over 10% on the day following the general election on relief that any plans Labour had to nationalise parts of the rail industry had now dissipated. We used this strength to reduce our holding and lock in profits.

FDM Group

We used a post election rally to sell our remaining modest holding following a post election day rally. A trainer and provider of high quality contract IT staff to global firms, the shares have been a spectacular performer, more than trebling, since purchase at IPO in 2014.

 

Cumulative Performance (Total Return %)– December 2019

Fund/Benchmark Name Year to 31/12/2019 3 Years to 31/12/2019
5 years to 31/12/2019
Since Inception (28/05/1997)
MFM UK Primary Opportunities P Acc 18.92 31.73 61.59 440.39
Quartile Ranking – IA UK All Cos 3 1 1 1
IA UK All Companies 22.30 23.81 43.89 290.35
FTSE All Share 19.17 22.01 43.84 299.62

 

Discrete Annual Performance (Total Return %)– December 2019

Fund/Benchmark Name Year to 31/12/2019 Year to 31/12/2018 Year to 31/12/2017 Year to 31/12/2016 Year to 31/12/2015
MFM UK Primary Opportunities P Acc 18.92 -7.20 19.36 13.99 7.61
Quartile Ranking – IA UK All Cos 3 1 1 2 2
IA UK All Companies 22.30 -11.19 13.99 10.82 4.86
FTSE All Share 19.17 -9.47 13.10 16.75 0.98

Source: FE 2019

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 FCA. 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