February update – a benign market comes to an abrupt halt as global markets sell off

19th March 2018

In February, IFSL RC Brown UK Primary Opportunities (-4.11%) underperformed the UK equity market (-3.27%). The Fund is a top quartile performer over one and three years.

We participated in placings in Fulcrum Utility Services, Diversified Gas & Oil, Unite Group and Easyhotel. We also purchased some of the ‘rump’ placing in Cineworld following its rights issue. We used the market weakness to add modestly to our exposure in Vodafone and Royal Dutch Shell, both of which we consider attractively valued with strong dividends.

February proved a difficult month for global markets as an end to low volatility markets came to an abrupt end – the catalyst being strong US payroll data amid belief US rates will need to rise faster than expected. President Trump’s protectionist talk over steel and aluminium tariffs also proved unhelpful.

We have previously noted the strong rise in equity markets and whilst never welcome, a sell off had become inevitable since the very strong run, particularly in US equities, which remain expensive. We continue to see a plethora of primary opportunities and in times of market volatility we are inclined to obtain even bigger discounts from companies seeking to raise money. As ever, investing in good quality companies remains high up the agenda.

Purchases

Fulcrum Utility Services
Fulcrum is a market leader in gas and electricity connections to the residential, commercial and industrial markets. The shares were acquired as part of a £10m raise for an acquisition which increases their footprint in electrical connections. We consider the Company modestly valued with a 3% dividend yield.

Diversified Oil & Gas
A low risk small cap oil & gas producer and explorer – a rare beast! We acquired the shares as part of a $180m raise to purchase further on shore US oil assets. The Company targets long life, low decline assets and unusually for this type of business pays an attractive dividend of over 5%.

Unite Group
A Company we are very familiar with which the Fund first invested in at IPO back in the late 1990’s. We participated in a placing of £170m which is to fund 2 further student accommodation sites. Unite is the clear market leader in this sector and is well established with the quality universities. Interestingly one of the new sites is in London with King’s College, with the Company citing greater value in the capital following recent falls in property prices.

EasyHotel
Easyhotel was founded by EasyJet founder Stelios Haji-Ionnau offering low cost accommodation in well located city centres. Currently with 26 sites, the £50m fund raise which we participated in will be used to fund a further 10 hotels in the UK and Europe.

Cineworld
One of the UK’s largest cinema operators. The Company had a £1.7bn rights issue to fund the acquisition of Regal Entertainment, the 2nd largest cinema operator in the US. We purchased some of the ‘rump’ placing – those shares not taken up by existing shareholders. Whilst the acquisition has risk given its size and the stagnant nature of US cinema, we have a high regard for the management and their ability to turn around Regal.

Sales

Eddie Stobart Logistics
With the recent purchase of Clipper Logistics, which we consider a higher quality company with its e-tail specialism, we wanted to reduce exposure to the UK logistics sector and whilst a solid company, the shares have not performed as well as we would have hoped.

Supermarket Income REIT
With severe market weakness, we took the opportunity to increase cash levels by selling some of our more defensive holdings that had held up well in a falling market.

Dechra Pharmaceuticals
Following a good set of results which were well received by the market, we took some profits in one of our larger and better performing holdings.

AEW UK REIT
With severe market weakness, we took the opportunity to increase cash levels by selling some of our more defensive holdings that had held up well in a falling market.

Sabre Insurance
We trimmed the holding given its defensive characteristics in a weak market but consider it to still offer value and an attractive dividend yield.

Warehouse REIT
With severe market weakness, we took the opportunity to increase cash levels by selling some of our more defensive holdings that had held up well in a falling market.

On the Beach
One of our strongest performers, we took the opportunity of a strong price rise in weak markets to take some profits.

Luceco
Following a profit warning late last year, we took the opportunity to cut our modest holding following a modest price bounce. Having disappointed in the first 18 months as a listed Company, history has taught us it is better to sit on the sidelines and await further newsflow.

Cumulative Performance (Total Return %)– February 2018

Fund/Benchmark Name Year to 28/02/2018 3 Years to 28/02/2018 5 years to 28/02/2018
IFSL RC Brown UK Primary Opportunities P Acc 11.56 35.93 60.60
IA UK All Companies 6.59 20.14 48.88
FTSE All Share 4.40 18.82 42.10

Discrete Annual Performance (Total Return %) – February 2018

Fund/Benchmark Name 28/02/2017 to 28/02/2018 28/02/2016 to 28/02/2017 28/02/2015 to 28/02/2016 28/02/2014 to 28/02/2015 28/02/2013 to 28/02/2014
IFSL RC Brown UK Primary Opportunities P Acc 11.56 25.11 -2.63 1.78 16.09
IA UK All Companies 6.59 19.18 -5.42 3.76 19.43
FTSE All Share 4.40 22.88 -7.37 5.56 13.29

Source: FE 2018

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 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