Out of all the pain felt in the UK markets this quarter, it was certainly most keenly felt in the AIM and UK Small Cap markets which ended the quarter -34% and -22% year-to-date.
Smaller companies continued to take further pain in the market, and it appears to be the first port of call for many investors when looking to raise liquidity. Despite this, there are many businesses that look attractive and very reasonably priced. We have been busy across the portfolio.
Beazley, a business we added to throughout 2020 and 2021, reported early in the quarter and since then the shares have gone from strength to strength. Management pointed to strong momentum in underlying underwriting margins, even though the potential horizon risks look rather extreme (e.g. its aviation book of business and Russia). It is our number one holding in the portfolio and we have been top-slicing as and when other opportunities present themselves. Additionally, we have fully exited two other holdings in the fund: the big box (mega distribution centre) owner Tritax Eurobox and ICG Enterprise Trust. Being a smaller companies fund we feel that private equity is a prudent deployment of an allocation of our capital, and we have been served well over the past few years. However, we decided to exit the sector in July over valuation worries in their underlying portfolio’s which may have been excessively inflated over the past few years with the abundance of liquidity in the sector.
We used proceeds to top up concrete screed specialists Somero Enterprises, Self-storage business Big Yellow Group, merchant bank Close Brothers and specialist industrial TT Electronics Group. Furthermore, we initiated three new positions in businesses we have been following and researching over the past two years. Pub operator Fuller Smith & Turner was bought in July following a good call with management. Trading momentum has continued to improve since Omicron lockdowns and, particularly good news, tourist trade in London is back. The Balance Sheet is in good health and well capitalised to boost the share price, a management valuation was commissioned (20% externally verified) that valued the estate at just shy of £14 per share (versus a then £6 share price). Also, in the consumer sector we initiated a holding in Pets At Home Group. Although it is an out of favour bricks and mortar retailer, it has been growing at a decent rate (8-10%) since IPO in 2014 and has benefitted from the growth of their in-house vets business and people caring more about what their animals eat. Finally, we initiated a small position in UK wearable technology business (more electronic on-remand tag than smart watch), BIG Technologies who have market-leading technology with a strong management team and are looking to capitalise on the evolving tech to capture contracts in the Justice space across the Western World.
Although it has been a tough quarter, and indeed year, for the Smaller Companies fund, there is no denying that the innovation and quality in smaller UK businesses is still here.
The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.
Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.