Investment commentary - UK Opportunities Fund

Update, October 2019 

October gave markets a taste of what to expect when the fog of Brexit, one way or another, finally clears. We have a long road ahead on this convoluted journey, but an agreement between the government and EU sent sterling strengthening more than 5% against the dollar. This is a substantial move for a developed currency pairing and translates into a re-rating of the British economy as a place to store, and grow, capital. 

The result of this, in sterling terms, was a significant outperformance of domestic indices over global peers and, more locally, an outperformance of domestically orientated (and smaller) companies over larger, more internationally biased, peers. Your fund is overweight smaller companies relative to the FTSE All-Share Index and we have spent the last six months gradually increasing our exposure to domestic revenues, so we were positioned well for what unfolded. We made 1.0% compared to a -0.3% return for the IA All Companies sector. 

Away from Brexit, there are green shoots of optimism in the global economy too. Economic data appears to be bottoming out, while the major economies are now, almost in unison, adding stimulus either via interest-rate reductions or asset purchases. But a confirmed improvement will require the US and China to come to an agreement over their trade war, something we can’t guarantee. So we are sticking to our approach of focusing on high-return defensive business models over their more economically sensitive counterparts. 

With regard to individual holdings, GB Group (GBG) is becoming the stock that really won’t stop. Late in the month, it reported yet another stellar set of results, with growth rates beating expectations and profit margins ahead of forecasts for good measure. We maintain a strict discipline with GBG. It is a highly valued tech stock, listed on AIM. As such, we limit it to a 3% position and so had to trim a little once again.

Over the last few months, the market had got comfortable again with gambling company GVC. It has been a year since the increase in UK gambling regulations and there has been no unforeseen impact on the company’s operations. This allowed the company’s strong online revenue growth rates and undeniable US opportunity to take the mic. Your holding rallied from around 550p per share in August to nearly 900p by the end of the month. Just four days after month-end, this rally was stopped in its tracks by a UK All-Party Parliamentary Group suggesting a £2 limit on online casino gambling (following the limit imposed on in-store digital terminals earlier this year). GVC shares now sit just above 800p. We will monitor this situation carefully. We believe, long term, regulation is helpful to incumbents like GVC; however, it can create headaches in the short term. 

accesso had a difficult month. It admitted that potential buyers, who had been sniffing around since July, had failed to come up with an offer that accesso’s board could recommend to shareholders. This news was a disappointment; Still, we believe a takeover is only a matter of time now and hold onto a sub-1% position.

Elsewhere, high quality computer game producer Team 17 fell back from recent highs on news that its second CFO since listing was leaving. Such instability in the C-suite is unwelcome. What appears to be quite unchanging, however, is the businesses’ propensity to beat earnings forecasts – something we were treated to (again) after month end.  

We have trimmed a few holdings recently. Specifically, we have taken profits from recent ‘winners’ such as Intermediate Capital Group, Halma and the aforementioned GBG. We haven’t lost faith in these businesses, indeed we see no reason today why we won’t still own them years from now. But their valuations require further heroic results, so we have taken a little off the top and redistributed the cash into companies which we believe are in the early stages of their own purple patches.  

One such company is the UK property platform Rightmove. This is exactly the kind of domestically orientated company we want to own. You will struggle to operate as an estate agent without subscribing to a property advertisement platform. Rightmove is the most popular choice, with about 80% market share. More importantly, it has sustained this share on a virtually uninterrupted basis for years, despite a conveyor belt of ‘disrupters’. Such is the strength of Rightmove’s position, these raids typically end in failure (even Google lasted only 12 months). In Rightmove, we see a company enjoying very high returns off the back of a resolute competitive position within a mature and steady market. Recently, investors have looked solely at stagnant London property prices, Brexit and the usual risk of disruption, giving us a chance to buy a high quality company at a reasonable price. 

The upcoming election puts UK assets back into something of a holding pattern, where investors appear unwilling to make too many sudden moves. Poll watching will replace investment strategy for a while, so we have lined up scores of companies to see in the expectation of finding business models that can move on along with the rest of the country. 

Alexandra Jackson, CFA,
Fund Manager

This is a financial promotion relating to a particular fund. Any views and opinions are those of the investment manager, and coverage of any assets held must be taken in context of the constitution of the fund and in no way reflect an investment recommendation. Past performance should not be seen as an indication of future performance. The value of investments may go down as well as up and you may not get back your original investment.

Source performance data, Financial Express, bid to bid, net income re-invested.