July update – markets rise again as we participate in a further six varied primary opportunities

9th August 2019

We participated in six primary opportunities in July in what proved another busy month for primary opportunities – Regional REIT, IMImobile, Renalytix AI & Synthomer all raised new money. There were secondary sell downs in Anglo American and Morses Club, the latter we purchased from Woodford Investment Management, the second discounted stock we have purchased from them since the Woodford Equity Income Fund (WEIF) was suspended.

In July, the MFM UK Primary Opportunities Fund returned 1.58% compared with 2.00% for the FTSE All Share and 1.70% for the IA UK All Companies Sector.

With WEIF suspended until at least December, some time has been bought to allow as orderly an unwinding of positions as possible. Nevertheless, there remains an overhang on a number of mid and small caps where they are the largest shareholder. We continue to monitor further opportunities to buy discounted stock from what we consider a forced seller. Last month we added to our holding in Ten Entertainment Group that was purchased from Woodford Investment Management – with the overhang now cleared, the shares are trading 13% higher than the price we paid. This month we added Morses Club in the same way in what we consider an attractive entry point. There are numerous other companies where Woodford will need to reduce or exit large holdings and we may look to selectively make additions to the portfolio as a result of this.

As we wrote in last month’s update, fund liquidity is very important to us. With over 50% invested in FTSE 100 stocks, over 15% in FTSE 250 and the vast majority of small caps having a market capitalisation in excess of £100m and good liquidity, we are confident that our Fund could be liquidated at market levels in a matter of days, should the need ever arise. We do not invest in unquoted businesses.

At a market level, equities again enjoyed a strong month buoyed by an interest rate cut and continued hopes of a constructive outcome over the China-US trade war. The UK market hit a nine month high as sterling continued to slide on the increased likelihood of a no deal Brexit under Boris Johnson’s government. This has further emphasised the value of the UK as a market relative to other developed markets. FTSE 250 constituents, Enterprise Inns and Cobham were both bid for in the month.

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

 

***Stock in focus***

London Stock Exchange

The LSE enjoyed its strongest one day gain in a decade as it announced it would buy Refinitiv, a data company best known for its desktop terminals that feed market data and news to traders and fund managers, for $27bn. The market reacted well as it diversifies the Company into the valuable and fast growing data & news sector. The shares have trebled since we purchased via a placing in 2015. It represents 1.4% of the Fund.

 

Purchases

Morses Club

Morses is a UK finance consumer business specializing in non standard loans and is the second largest operator in the UK home collected credit market. We acquired the shares as part of a clean up trade as us and other institutions took Woodford Investment Management out of their holding, as they continue to raise funds triggered by the suspension of WEIF. Already trading at a depressed level as a result of the Woodford overhang, we purchased at a discount to this level and anticipate that the shares will re-rate now the overhang has been cleared. Modestly rated and with a dividend yield of over 5%, the shares offer value.

Regional REIT

Regional REIT is a UK focused commercial property company with a focus on regional offices. We acquired the shares as part of a £62m fund raise which will be used to purchase further assets. Trading at a 9% discount to NAV and offering a class leading dividend yield of 7.7%, we consider the shares as attractively valued and should benefit from a conclusion to the current Brexit hiatus.

IMImobile

IMImobile is a cloud communications software business allowing companies to communicate more effectively with customers. Its clients include the AA, O2, EE and Pizza Hut in the UK. The shares were acquired as part of a £20m fund raise to help fund the acquisition of a US company that will accelerate growth in that country.

Renalytix AI

Renalytix uses artificial intelligence for the early detection of kidney disease, one of the most common and costly chronic medical conditions globally. The Company has been awarded ‘breakthrough device designation’ by the FDA and is awaiting full FDA approval. Whilst the shares are at the higher end of our risk profile, the Company has delivered ahead of schedule on its commitments since IPO last year and the potential addressable market is large.

Anglo American

Anglo is a global diversified mining company and constituent of the FTSE 100. It is perhaps best known as the owner of De Beers. Following a strong set of results which saw a 46% rise in net profit and the launch of a $1bn share buyback, we acquired the shares as part of a sell down by the largest shareholder at a 4% discount to the previous night’s closing price.

Synthomer

Synthomer is a specialist chemical company whose polymers are used in a range of market sectors such as coatings, construction, textiles and synthetic latex gloves. The Company was previously known as Yule Catto. We acquired the shares as part of a rump placing following a £200m right issue to fund the acquisition of a US business.

 

Sales

Venture Life

We sold our remaining holding in this self care consumer products company. The shares climbed as a result of being tipped in a retail investor magazine. We were happy to use the subsequent liquidity to take profits and recycle the money into new primary opportunities.

Avast

We trimmed our holding (taking some profits) in this cyber security software company following a double digit gain in its share price over the month.

Quilter

With the recent additions of AJ Bell and Brewin Dolphin to the portfolio, we used market strength to sell our holding and take profits in this wealth manager.

Standard Life Aberdeen

Following news of an agreement to settle its arbitration over a large mandate it runs for Lloyds Bank, we used the share price strength to trim our holding. The shares remain modestly valued with a dividend yield of over 7%.

Astrazeneca

Following a rise in sales guidance (and also benefitting from weak sterling), we used the share price surge to reduce the holding in one our largest holdings to help fund new primary opportunities.

The Gym Group

We took advantage of a positive trading update in this low cost gym provider, to sell our remaining, modest holding in order to recycle the funds into new primary opportunities.

 

Cumulative Performance (Total Return %)– July 2019

Fund/Benchmark Name Year to 31/07/2019 3 Years to 31/07/2019
5 years to 31/07/2019
Since Inception (28/05/1997)
MFM UK Primary Opportunities P Acc 0.59 38.64 52.48 413.21
Quartile Ranking – IA UK All Cos 2 1 1 1
IA UK All Companies -1.18 24.97 36.86 267.01
FTSE All Share 1.27 27.01 38.95 286.44

 

Discrete Annual Performance (Total Return %)– June 2019

Fund/Benchmark Name Year to 31/07/2019 Year to 31/07/2018 Year to 31/07/2017 Year to 31/07/2016 Year to 31/07/2015
MFM UK Primary Opportunities P Acc 0.59 8.09 27.51 4.49 5.26
Quartile Ranking – IA UK All Cos 2 3 1 1 3
IA UK All Companies -1.18 8.49 16.57 0.86 8.58
FTSE All Share 1.27 9.15 14.9 3.82 5.38

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