June update. Up and Down

8th July 2020

These remain exceptionally unusual and unprecedented times. Following the sharpest market falls in history in March, we saw a good bounce in April & May whilst June has seen further more modest gains. It has proved an extremely volatile month – the first week saw a near 7% rise in the FTSE followed by the sharpest falls since March as fears grew about the impact the shut down has had on the global economy and fears of a second wave of the pandemic. News that the UK economy had contracted an eye watering 20% in April (following on from a 6% contraction in March), only served to remind investors the long road ahead to rebuild the economy. A rebound is inevitable from such low levels as the economy starts to re-open but a recovery is likely to be slow as confidence takes time to rebuild and unemployment rises.

Whilst current conditions are unquestionably difficult, they do produce opportunities to add high quality companies trading at multi year lows to the portfolio. We anticipate these companies not only surviving but able to thrive in years to come as the recovery takes hold. The disruption caused will mean some industries and working methods change for good – to the benefit of some companies and the detriment of others. Well capitalised, nimble and forward-looking companies should thrive as weaker competitors fail to make the necessary changes to their business models.

We are seeing a very high level of companies wanting to raise capital to strengthen their balance sheets – so far over 80 London listed companies have raised in excess of £13bn. 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 Anexo, Dechra Pharmaceuticals, Avacta, Whitbread, Ocado, Taylor Wimpey, Hikma Pharmaceuticals and Easyjet were added to the portfolio as part of fund raisings.

We also added to our existing holdings in Diaceutics and Marlowe.

In June, the MFM UK Primary Opportunities fund returned 0.2% compared with 1.5% for the FTSE All Share and 0.6% 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

Anexo

Anexo is an integrated credit hire and legal services provider acting for the non fault motorist. We acquired the shares as part of a placing to fund the future opportunities including acting for those who have lost value in their vehicle assets as a result of the Volkswagen emissions scandal, whereby VW cheated emissions testing.

Dechra Pharmaceuticals

Dechra is a specialist developer and manufacturer of products to the vetinary market globally. A FTSE 250 company with a strong track record and defensively postioned as consumers continue to spend on pet care during a downturn. We acquired the shares as part of a £130m placing aimed at reducing debt and allowing the company to take advantage of upcoming acquisition opportunities.

Avacta

Avacta is a pharmaceuticals company with two main businesses – one a targeted chemotherapy, the other an alternative to antibody testing. The company raised £45m to accelerate its expansion, including the development of a COVID-19 antigen testing kit which is saliva based and results provided in minutes. The shares are not without risk but the potential size of the market warrants us taking a modest position.

Whitbread

Whitbread is the owner of the UK’s largest operator of hotels, Premier Inn. It also owns a number of restaurant chains including Brewers Fayre and Beefeater. We acquired the shares as part of a £1bn right issue undertaken to strengthen the company’s balance sheet. Clearly trading has suffered materially as a result of the pandemic. Nevertheless as a market leader and with its nearest competitor Travelodge in financial difficulties, it sees opportunities to take advantage by buying sites from competitors and benefit from lower land prices to develop new sites.

Ocado

Ocado, the online supermarket, was for much of its quoted life a ‘marmite’ stock. We visited the company at IPO in 2010, coming away impressed, but uncomfortable with the valuation for what ultimately was an online food delivery business. We therefore decided against an investment. Over the last few years, it has successfully morphed itself into a business successfully licensing its technology to other retailers globally. It has been a clear beneficiary of the pandemic with more customers using their online delivery service, many of whom we believe will permanently shift to online. We acquired shares in this FTSE 100 company as part of a £650m raise that will fund further expansion as a result of the demand for its services in a post Coronavirus world.

Taylor Wimpey

Taylor Wimpey is one of the UK’s largest house builders, last year building over 16,000 houses. We acquired the shares as part of a placing of over £500m to fund the acquisition of landbanks and take advantage of softer prices as a result of the economic downturn.

Hikma Pharmaceuticals

Hikma is a global pharmaceutical company manufacturing a broad range of branded and generic medicines. A FTSE 100 company, we acquired the shares at a 7% discount to the previous night’s closing price as part of a selldown by the largest shareholder.

Easyjet

One of Europe’s largest low cost airlines and famed for its bright orange aeroplanes. Like all airlines, Easyjet has had a torrid year due to the virtual shutdown of the aviation industry as a result of the pandemic. We acquired the shares as part of a £420m placing to strengthen the balance sheet ahead of what is likely to be a gradual recovery in flights which may take a number of years. With a stronger balance sheet, we anticipate Easyjet being a survivor and able to increase its market share.

Diaceutics

Diaceutics is a data analytics business servicing the global pharmaceutical industry, aiding them to deliver precision medications, producing better patient outcomes. Having first purchased at IPO in March 2019 (the shares have doubled as a result of outperforming expectations), we added to the holding as part of a £20m raise in order to provide expansion for future imminent growth opportunities. With so much focus currently on the pharmaceuticals industry, we consider Diaceutics with its ‘data lake’ well positioned to continue to service the industry and offer its clients faster routes to markets for the drugs they are developing.

Marlowe

We added to our holding in this fire and water safety testing business. We acquired the shares as part of a £40m fundraise for the acquisition of a contract management software business which will enhance and grow their existing offerings. We anticipate the company being a beneficiary of the greater focus on health and safety in the current environment.

 

Sales

Codemasters

We sold the holding in this video games developer following a strong set of results and a 50% return over twelve months.We continue to hold Team17 in the sector.

DWF

We sold the remaining holding in law firm DWF following a recent profits warning, deciding it best to cut our losses and deploy capital in forthcoming primary opportunities.

Sigmaroc

A modest holding, we sold this UK and European aggregates business following a good trading update and strong bounce post the Covid induced market falls. We continue to hold Breedon Aggregates in the sector.

PPHE Hotels

The remainder of the holding in this hotel group, best known for its Park Plaza brand, was sold following a recent update. The holding has effectively been replaced by the purchase of Whitbread, owner of Premier Inns, which we now see as a more compelling investment case.

The SimplyBiz Group

A provider of compliance and business support to directly authorized financial advisers and one of the fund’s smaller holdings. We took the opportunity of liquidity to sell what has been an uninspiring performer in order to recycle the funds into new opportunities.

Hays Recruitment

The shares have performed strongly, albeit they have been volatile since the recent fund raise. With the shares having gained over 25%, we view the shares as up with events and therefore took the decision to take profits.

The Pebble Group

We sold this provider of promotional products to global brands following a market update and bounce back in the shares following a Covid induced sell off. There may be further opportunities to re-enter the stock in the future.

Regional REIT

We sold this commercial property fund on concerns surrounding its tenants ability to pay rent and a reduced dividend, raising monies for the large number of new opportunities we are seeing.

Trainline

The remainder of the holding in this market leading train and bus website and app were sold. The shares had recovered to pre crisis levels ,and whilst we believe its long term opportunities remain compelling, train volumes will take some time to recover and the valuation appears expensive.

Dart Group

With the addition of Easyjet to the portfolio, we were content to take profits of over 40% in one of the UK’s leading package tour operators. We are always mindful of not having too much exposure to any sector and with the recent additions in the travel & leisure sector, we felt it prudent to take profits in one of the higher rated, more volatile holdings.

 

Cumulative Performance (Total Return %)– June 2020

Fund/Benchmark Name 3M to 30/06/2020
6M to 30/06/2020
Year to 30/06/2020
3 years to 30/06/2020
5 years to 30/06/2020
Since Inception (28/05/1997)
MFM UK Primary Opportunities P Acc 14.4 -15.2 -9.3 -1.1 31.1 358.4
Quartile Ranking – IA UK All Cos 2 2 2 2 1 1
IA UK All Companies 14.2 -17.7 -11.0 -5.1 11.5 221.1
FTSE All Share 10.2 -17.5 -13.0 -4.6 15.2 229.6

Source: FE 30/06/2020

 

Discrete Annual Performance (Total Return %)– June 2020

Fund/Benchmark Name Year to 30/06/2020 Year to 30/06/2019 Year to 30/06/2018 Year to 30/06/2017 Year to 30/06/2016
MFM UK Primary Opportunities P Acc -9.3 0.4 8.6 33.2 -0.5
Quartile Ranking – IA UK All Cos 2 2 2 1 2
IA UK All Companies -11.0 -2.2 9.1 22.5 -4.1
FTSE All Share -13.0 0.6 9.0 18.1 2.2

Source: FE 30/06/2020

 

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