Bath/Head Office & Unquoted Equity Team:
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MI Chelverton UK Equity Growth Fund – Monthly Manager Commentary – May 2017

Regular and unexpected election results seem to be the new norm for the UK. This time the market seems to have taken the poor showing by the Conservative Party in its stride as investors have focused on the economic implications of a softer BREXIT, whatever that may entail, rather than worrying about the new found electability of a Labour Party that is more left-wing than we’ve seen for decades, if not ever. In the meantime there’s evidence that the domestic economy is finally softening as the consequences of weaker sterling, particularly on the consumer, start to bite with purchases of discretionary large ticket items coming under pressure. This phenomenon won’t be helped by the uncertainty caused by a hung Parliament and the MPC’s most recent vote taking us closer to a rise in rates to curtail the growing inflationary pressure caused by weak Sterling.

After the “super-soar-away” April, the Fund had a more pedestrian month, performing in line with its IA UK All Companies benchmark in May. We enjoyed strong performance from Eckoh and Coats Group on the back of strong trading updates. Alpha FX continued its strong run from its listing in April. GB Group reacted well to an earnings enhancing acquisition and On The Beach moved ahead strongly on the back of reassuring results. On the downside, Revolution Bars fell back very sharply after warning on profits late in its financial year, having failed to pick up on the full impact of business rate and wage inflation in its business. Operationally, underlying sales and gross margins continued to perform as expected and its accountancy function has been strengthened by the appointment of a new CFO with industry relevant experience, so we are persevering with our involvement, believing the shares may have over-reacted to the disappointing news.

During the month we sold some of our more highly rated holdings exiting Porvair, which has served us well since the Funds inception, on valuation grounds whilst reducing our holdings in Ascential, Gamma Communications and Spectris. We started a holding in Maintel Holdings, a unified telecommunications service provider to the SME market with high levels of recurring revenues. It trades on a relatively low valuation in stark contrast to the equipment providers to the same market, like Gamma Communications. We also started holdings in Castleton Technologies, an IT solutions and managed service provider to the UK social housing market, and JackpotJoy, Britain’s largest online bingo operator, a highly cash generative and growing business, which is trading at a significant discount to other online gaming companies.

With UK economic growth showing signs of stalling, we are focusing more and more on companies with resilient revenue streams, overseas exposure and structural growth opportunities, which hopefully will still drive growth in a slowing economic environment. With the Fund having performed relatively well so far this year we are constantly looking to engineer better value into the portfolio, which explains our new investments above.