June update – how the fallout from the suspension of the Woodford Equity Income Fund can benefit our Fund using our primary opportunities approach and the importance of liquidity

8th July 2019

We participated in six primary opportunities in June in what proved another busy month for primary opportunities – LXI Reit raised new money and there were secondary placings in AJ Bell, Ten Entertainment Group and Codemasters. The Trainline and Argentex both made successful IPO’s.

In June, the MFM UK Primary Opportunities Fund returned 2.92% compared with 3.67% for the FTSE All Share and 2.42% for the IA UK All Companies Sector.

There has been widespread media coverage of the shock suspension of one of the largest UK equity funds, the Woodford Equity Income Fund (WEIF) in circumstances not witnessed by my two co-managers Alan Beaney and Bob Brown, who combined have more than eighty years experience in fund management. It is not for us to comment on the trials and tribulations of other fund managers, other than for us to acknowledge and remind ourselves that active fund managers can and do have periods of underperformance. What this incident particularly highlights to us is the importance of the underlying liquidity of the stocks that make up a fund. 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.

Given the size of WEIF (and related funds) and the redemptions that Fund will surely continue to see, we anticipate being able to benefit from buying into some of those companies held by WEIF at discounted prices. One of our stated methods of buying a secondary sell down is from forced sellers. Woodford very much fits into this category as he must raise money to meet redemptions. This month we added to our holding in Ten Entertainment Group as we, along with a number of other institutions, took Woodford out of his large stake in the Company. Importantly we were buying at a discount to an already depressed share price as a result of the perceived overhang of Woodford’s holding that was viewed as a likely candidate to be sold. 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.

At a market level, equities enjoyed a strong month buoyed by dovish comments from the Federal Reserve’s Chairman. Rather than the next move in interest rates being higher, a cut is now widely believed to be more likely over concerns global growth is slowing. The European Central Bank also signalled its willingness to provide stimulus if necessary. Trade tensions between the US and China remain strained, albeit there are conciliatory tones, although of course with President Trump, things can change quickly.

Sterling remained weak as Boris Johnson emerged as the likely successor to Theresa May as Prime Minister. A no deal Brexit cannot be ruled out. Nevertheless, the underlying valuation of the UK market is continuing to see M&A, particularly from overseas buyers. In the portfolio Tarsus and Premier Technical Services Group have both been bid for at substantial premiums to the undisturbed share price. We expect both deals to happen and will look to re-invest the proceeds in new primary opportunities.

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

LXI Reit

LXI is a UK property company investing in a diversified portfolio of commercial properties backed by strong tenants and long let, inflation linked leases. Having first purchased the shares at IPO in 2017, we bought back into the Company as part of a £200m raise to fund further property purchases. The shares are already trading 8% above our entry price and offer an attractive dividend yield of over 4%.

AJ Bell

AJ Bell is an investment platform company that provides stock broking, wealth management, custody and dealing services, principally to retail investors. It is the No 2 market player behind Hargreaves Lansdown. We acquired the shares at a discount as part of a placing by largest shareholder Invesco.

Ten Entertainment

We added to our holding in the UK’s second largest ten pin bowling operator. The shares were purchased from a block sell down by Woodford Investment Management, who are under pressure to liquidate assets due to fund redemptions. The shares were already depressed due to the overhang and now this has been cleared the shares are trading at a 6% premium to our purchase price.

Codemasters

A video games developer, best known for its Formula 1 titles. We acquired the shares at an 11% discount to the previous night’s closing price as part of a secondary sell down by private equity. The Company has traded well since IPO last year.

The Trainline

The Trainline is the market leading website and app for booking train tickets in the UK. It also provides its software for other train operators and has recently commenced operations in Europe, a substantially larger market than the UK. We acquired the shares at IPO in what was a heavily oversubscribed offering with the shares having appreciated by over 15% in the early days of trading.

Argentex

Argentex is a currency provider focused on the SME market. Founded in 2011, it has grown rapidly aided by offering companies better foreign currency exchange rates and advice than the large banks. We acquired the shares at IPO where the money raised will allow the business to expand further by increasing its capital requirements. The shares have made a strong start, appreciating 25%.

 

Sales

PPHE Hotels

Following strong gains over a short period, we took the opportunity to reduce our holding in this hotel operator, best known for its Park Plaza brand.

Hargreaves Lansdown

Following the suspension of the Woodford Equity Income Fund and the close ties with HL, we took the decision to reduce our holding as the Company faces some short term uncertainty and potential closer scrutiny by the FCA over its buy lists. We continue to consider it a high quality business, but with a demanding rating, we felt it prudent to reduce our exposure.

Mears

A housing and service provider to the public and private sector, the shares have been a disappointing performer and we used the recent share price rally to cut our losses and recycle the proceeds into new primary opportunities.

The Works.co.uk

A discount retailer and a rare growth company expanding on the high street. Nevertheless, the Company has not been immune to the challenging conditions on the high street. Following a disappointing update, we decided to cut our losses in one of the Fund’s smallest holdings.

 

Cumulative Performance (Total Return %)– June 2019

Fund/Benchmark Name Year to 30/06/2019 3 Years to 30/06/2019
5 years to 30/06/2019
Since Inception (28/05/1997)
MFM UK Primary Opportunities P Acc 0.87 49.43 51.63 405.25
Quartile Ranking – IA UK All Cos 2 1 1 1
IA UK All Companies -1.82 35.53 34.20 260.41
FTSE All Share 0.90 36.93 35.66 278.85

 

Discrete Annual Performance (Total Return %)– June 2019

Fund/Benchmark Name Year to 30/06/2019 Year to 30/06/2018 Year to 30/06/2017 Year to 30/06/2016 Year to 30/06/2015
MFM UK Primary Opportunities P Acc 0.87 8.63 33.21 -0.52 4.67
Quartile Ranking – IA UK All Cos 2 2 1 2 3
IA UK All Companies -1.82 9.07 22.53 -4.10 7.03
FTSE All Share 0.90 8.63 33.21 -0.52 4.67

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