MFM UK Primary Opportunities | Fund Update | February 2021

11th March 2021

The year’s equity raises have only just begun

The pipeline of equity fund raising is coming to fruition. This is due to the combination of companies wanting to expand into the anticipated economic recovery and a backlog of deals that had been delayed as a result of uncertainty caused by the pandemic and Brexit. We are exceptionally busy at present with the volume of fund raises – very positive we believe for investors in the Fund as we are able to choose from those primary opportunities that meet our quality criteria, which we firmly believe will add value over the months and years to come.

In a very busy month, we purchased Moonpig and Auction Technology Group at IPO whilst JD Sports, Distribution Finance Capital and Jet2 raised capital. Dunelm was also added to the portfolio as part of a secondary sell down by the founding family.  We are currently looking at a number of further IPO opportunities. Over £3bn has been raised already this year by companies floating in London. We anticipate much more to come.

The UK market ended the month higher – there was notable strength in mid and small caps as the UK’s successful vaccination programme fuelled hopes of a faster economic recovery than other nations. Sterling strength acted as a drag on the FTSE 100, as many of its largest constituents have high proportions of revenue from overseas.

What is clear to us is the valuation gap between the UK and other developed markets. We expect this to narrow over coming years and the UK market, given its international nature, is well geared to a global economic rebound. The trade deal with the EU should also provide some clarity and encourage overseas investors who have been eschewing the UK to re-enter. As active primary opportunity investors, typically investing at the time a company is raising money, we are well positioned to invest in companies seeking to expand in 2021 and beyond. Conditions provide fertile ground for active investors – those who merely participate in buying passive funds we believe are set to miss out further.

We remain excited for the prospects of our current portfolio as well as the primary opportunities that we are currently considering for future investment.

In February the MFM UK Primary Opportunities fund returned 5.20% compared with 1.99% for the FTSE All Share and 2.93% for the IA UK All Companies sector. Performance has been particularly strong of late, as many of those companies purchased in 2020 are putting their plans into place, that the market is now starting to appreciate. The IPO market is also particularly attractive at present giving us the opportunity to provide further performance to shareholders.

***Stock in focus***

Essensys

Essensys develops software used by flexible workspace operators, an area that was growing before the pandemic and is expected to continue growing as the traditional office model of long term leases becomes less popular. The shares were purchased at IPO in 2019 and despite the company consistently hitting sales and profit targets, the shares have remained around their IPO price. To us this made little sense – a fast growing technology company with a promising pipeline in a growth sector – we would have expected to see strong demand for the shares. This past month, the market has awoken to the company’s prospects with the shares rising over 40%. Sometimes smaller companies can get overlooked – our patience is beginning to be rewarded and we await further positive newsflow over the coming months.

Purchases

Moonpig

Moonpig is a fast growing online card and gifting business. With a market share of over 60% in the UK, it is poised for growth in other territories such as the US and Australia. We purchased the shares at IPO and the shares have already appreciated over 20%.

JD Sports

JD, a FTSE 100 constituent,  is a leading retailer of sports and leisure wear with stores globally and a growing presence in the US. It also owns the Blacks and Millets outdoor focused retailers in the UK. We acquired the shares as part of a £460m equity raise to fund further expansion, notably in the US, following a recent acquisition there. A high quality operator that we have long admired with a strong online offering to support its retail store portfolio.

Distribution Finance Capital Holdings

DFCH is a specialist commercial lender focused on manufacturers and dealers in the UK. Motorhomes, caravans, boats and holiday homes make up over half its lending book. They facilitate short term lending to allow the manufacturer to be paid once the asset has been produced and provide finance to the dealer which they then repay to DFCH once the asset has been sold. We acquired the shares as part of a £40m equity raise to provide capital to expand its loan book.

Jet2

Jet2 is a leading UK travel operator and the country’s third largest airline, flying to over 70 destinations predominantly in Europe. Clearly the business has been hard hit by the pandemic and we acquired the shares as part of a £420m equity raise to provide liquidity for the company as the busy summer 2021 season will be at a reduced level. Importantly, with the vaccine roll out in full swing, we see significant pent up demand for overseas holidays when permitted and Jet2 as a large and well capitalised operator is well placed to take market share from weaker rivals.

Dunelm

Dunelm is a leading UK home furnishings retailer with over 170 stores. The company has adapted well to lockdown by improving its online and click and collect services. As people spend more time at home, they have been more prepared to spend on home furnishings. We acquired this high quality operator at a 10% discount to the previous night’s closing price as part of a placing by the founding family. We believe the company is well placed for further growth when its stores re-open.

Auction Technology Group

ATG provides platform technology allowing over 200 auction houses globally to provide their services online and connect with bidders in over 150 countries. Auctions take place across a broad range of industries including industrial machinery & farm equipment, arts & antiques and consumer surplus/retail returns. We acquired the shares in this fast growing industry disruptor as part of the IPO process.

Unilever

We added to our holding in this FTSE 100, global consumer goods company, owner of brands such as Ben & Jerry’s and Marmite. With the shares falling back to lows reached last March as the pandemic sell off took hold, we took the decision to buy stock in the open market. With the shares having de-rated and a dividend yield of over 4%, we see this an opportune time to add to our holding.

Sales

In what was a particularly busy month for purchases,  we were active in raising cash for these new primary opportunities that we believe will produce a greater return than what we already hold – whilst always keeping a well balanced portfolio across different sectors and market capitalisations.

We used the government’s promising pathway out of the lockdown to exit our holdings and take profits in SSP and Easyjet which both soared on the unlock programme. We believe both may require some extra capital which will give us the opportunity to buy back in should we wish. Their sales also made way for the purchase of Jet2. Engineer Ricardo was sold for healthy profits following a particularly strong run and we felt the shares were up with events. Holdings in Ocado, Renalytix AI, Compass, Bytes Technology, IP Group and Johnson Service Group were trimmed on strength. We also exited our holding in small cap MJ Hudson which has been a disappointing performer.

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.

Cumulative Performance (Total Return %) – February 2021

Fund/Benchmark Name

3M to

28/02/2021

6M to
28/02/2021
Year to 28/02/2021 3 Years to 28/02/2021 5 years to 28/02/2021 Since Inception (28/05/1997)
MFM UK Primary Opportunities P Acc 12.1 20.6 14.3 16.5 62.8 455.2

Quartile Ranking IA UK All Companies

1 1 1 1 1 1
IA UK All Companies 6.5 15.5 8.5 8.1 37.0 274.0
FTSE All Share 5.1 12.0 3.5 3.8 33.0 264.6

Source: FE: 28/02/2021

Discrete Annual Performance (Total Return %) – February 2021

Fund/Benchmark Name Year to 28/02/2021 Year to 29/02/2020 Year to 28/02/2019 Year to 28/02/2018 Year to 28/02/2017
MFM UK Primary Opportunities P Acc 14.3 1.9 0.1 11.6 25.2

Quartile Ranking IA UK All Companies

1 2 2 1 1
IA UK All Companies 8.5 1.0 -1.3 6.6 18.9
FTSE All Share 3.5 -1.4 1.7 4.4 22.8

Source: FE: 28/02/2021

Source: RCBIM as at 28 February 2021

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