March update. Covid-19. Health warning. Profit warnings.

8th April 2020

March market meltdown, where do we start?

Firstly, some facts – this was the fastest market move into bear territory in history, (a fall of greater than 20% from peak), taking just three weeks. The reason is financial markets simply do not know how to price in the potential for global economic lock down for an unspecified period of time and the resulting bankruptcies and unemployment that would ensue. With no real visibility on earnings, investors fled risk assets such as equities. Central banks stepped in quickly to prevent a repeat of 2008 where banks stopped lending and cut interest rates to record lows in order to encourage banks to maintain lending. Monetary policy alone is not sufficient in this situation, so the newly installed Chancellor of the Exchequer, Rishi Sunak, announced an unprecedented £330bn package to support workers hit by the Coronavirus epidemic. For the first time in history, the UK government is effectively paying private employees directly, by offering government support of up to £2500 a month per employee. The belief is that it is better to support the economy through the shutdown, by protecting businesses and jobs, so that when restrictions are lifted and normality returns, the economy can restart, rather than allowing large swathes of sectors to go bankrupt, mass unemployment and the economic depression that would likely follow. A bold plan, but the right one in our view.

During periods of market dislocation, as we have seen on an almost daily basis this past month – what steps do we as long-term investors take? Primarily, it is compulsory to stay calm, not always easy of course, and to keep a sense of perspective as shares prices lurch downward day after day. As an investment manager who cut his teeth during the 2008-09 great financial crisis and with my co-managers whose lengths of service also include the dotcom crash of 2000, Black Monday 1987 and the 1973-74 oil led bear market, we have substantial experience in dealing with market crashes.

First off, we looked to raise some cash by selling some of our holdings in companies that had held up relatively well but felt could come under pressure as indiscriminate selling took hold. Tritax Eurobox, Primary Health Properties and 3i Infrastructure were all sold. Holdings in Aztrazeneca, Breedon, Reckitt Benckiser and Unilever were trimmed, as all had outperformed materially, though remain core holdings. It is relatively unusual for us to buy stock in the secondary market, akin to a ‘typical’ investment manager, but these are the times where we can buy quality companies that we have long admired, at what we consider to be bargain levels. We used market weakness to add to our holdings in Anglo American, M&G and Vodafone. We have also taken a modest initial position in Next.

Prior to the crash we had been considering investment in two IPO’s, both have been pulled as a result of market uncertainty – they may return when some normality returns. Instead we have started to see companies raise equity in order to strengthen their balance sheets as a result of the impact the Coronavirus will have on their business. This, in our view, is good sensible management and we anticipate seeing a raft of recapitalisations, as we saw in 2009, in what proved to be a record year of performance for the Fund. A large number of companies have also cancelled their dividends in order to preserve cash. Whilst painful for those investors relying on income, in the current circumstances it is wise until the outlook is clearer.

The next few months will continue to see heightened volatility as markets bounce around on Corona related news. Some firms may indeed go out of business, but we do see reasons to be positive. The UK economy, and particularly listed companies, came into the crisis in generally good health and have lower levels of debt than in 2008. The banking system appears to be working, along with equity markets that are ready to help companies recapitalise. The big unknown is how long it will take for the virus to subside and some for normality to return, and how severely it may return in the future. We do not profess to have a crystal ball, but anticipate attractive primary opportunities occurring over the coming months which we will look to participate in.

We participated in five primary opportunities in the month – Urban Logistics, Ten Entertainment Group and SSP raised fresh capital. There was a secondary sell down in British Telecom, whilst we also participated in the IPO of FRP advisory, an insolvency and restructuring company.

In March, the MFM UK Primary Opportunities fund returned -17.43% compared with -18.51% 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

Urban Logistics REIT

Urban Logistics is a property company investing in industrial and logistics properties whose customers are increasingly meeting the challenges of e-commerce. Urban Logistics is differentiated from its larger competitors in that its sites are smaller and more localised. The shares offer an attractive dividend yield of over 5% and have held up relatively well in poor market conditions.

Ten Entertainment Group

Ten is the second largest ten pin bowling operator in the UK with 45 sites operating under the Tenpin brand. We have held the company since IPO in 2017 and participated in a £5m placing as the Company strengthened its balance sheet following the forced closure of all of its sites following the government’s COVID-19 restrictions. The Company has acted quickly to reduce its cost base by circa 60% and is eligible for government grants and has also deferred rent. The Company estimates it could withstand the current restrictions for at least 15 months, making it one of the strongest companies in the leisure sector and well replaced for when restrictions are lifted, and it is again able to re-open its doors. The shares are trading at a premium to their placing price of 155p.

SSP

SSP owns and operates food and drink concessions in airports and railways in over 35 countries. Its brands include Burger King where it operates over 100 sites, Jamie’s Deli and Upper Crust. It has clearly suffered from the restrictions placed on travel by governments worldwide, with shares losing over 50% of their value this year.  We acquired the shares as part of a £200m placing to reduce the Company’s debt, strengthening the balance sheet until such time that global travel can open up more freely. We view the Company as a market leader in a growing sector and view this an extremely attractive entry point.

British Telecom

BT is the leading telephony provider of fixed line, mobile and broadband services in the UK. We acquired the shares as part of a placing of US holders stock that was being sold as a result of the cancellation of the company’s listing on the New York Stock Exchange. The shares were purchased at a 4% discount to the previous night’s closing price and offer an attractive income profile in a recessionary environment.

FRP Advisory

FRP is a professional services company offering restructuring, debt, forensic and pension advisory work for businesses with financial difficulties. We purchased the shares at IPO and the Company will use funds raised to increase its footprint in the UK. It is a likely beneficiary of the looming recession.

Next

A leading UK retailer with a major high street and online presence. The shares have fallen sharply due to the impact of the Coronavirus on trading. Nevertheless, we consider it to be a well-run company, proving its adaptability over the years to a changing retail landscape. Very much a best of breed retailer. We purchased a modest holding in a quality company during a time of market pessimism.

Royal Dutch Shell

We used the proceeds from the sale in Diversified Gas and Oil to modestly add to our holding in one of the world’s largest oil companies, taking advantage of multi-year lows. Whilst oil prices will take some time to recover, we believe that when the restrictions start to lift and trade picks up, the oil price and this Company will be major beneficiaries of the subsequent recovery.

 

Sales

Astrazeneca

A global pharmaceutical company and one of the fund’s largest holdings, we trimmed our holding on significant out-performance during the market crash to raise funds for attractive primary opportunities.

Breedon

An industrial aggregates company. We reduced the holding following a strong set of results, taking advantage of strength in a very weak market.

Unilever

We trimmed our holding on relative strength in this global food producer. The shares remain a core holding.

Reckitt Benckiser

One of the FTSE 100’s best performers this year and a beneficiary of healthcare products during this crisis. We reduced our holding though the shares remain a core holding.

Diversified Gas & Oil

Oil prices have fallen sharply, partly due to the Coronavirus pandemic slowing global growth but also due to Saudi Arabia starting a price war with Russia after failing to agree an oil production cut. Given the Company’s largely hedged forward gas sales, the shares held up relatively well against a sector that saw sharp falls. We used the proceeds to increase our holding in Royal Dutch Shell, which as an oil major we consider better capitalised and will be a major beneficiary of an oil price and stock market recovery.

 

Cumulative Performance (Total Return %)– March 2020

Fund/Benchmark Name 3M to 31/03/2020
6M to 31/03/2020
Year to 31/03/2020
3 years to 31/03/2020
5 years to 31/03/2020
Since Inception (28/05/1997)
MFM UK Primary Opportunities P Acc -25.9 -20.8 -17.8 -8.3 14.4 300.7
Quartile Ranking – IA UK All Cos 2 2 2 1 1 1
IA UK All Companies -27.9 -22.8 -19.2 -14.7 -1.8 181.2

Source: FE 31/03/2020

 

Discrete Annual Performance (Total Return %)– March 2020

Fund/Benchmark Name Year to 31/03/2020 Year to 31/03/2019 Year to 31/03/2018 Year to 31/03/2017 Year to 31/03/2016
MFM UK Primary Opportunities P Acc -17.8 5.6 5.6 25.0 -0.2
Quartile Ranking – IA UK All Cos 2 2 1 1 2
IA UK All Companies -19.2 2.9 2.7 18.0 -2.4

Source: FE 31/03/2020

 

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