As anticipated after a very strong 3rd quarter, which saw a rebound from the BREXIT sell-off, October was a relatively poor month for the Fund as investors post the Tory party conference worried about the economic implications of a hard BREXIT, with renewed weakness in sterling once again driving the relative outperformance of foreign currency earning large caps over their more domestically focused small and mid cap peers. Banks and miners, where the Fund has no exposure, were particularly strong. Notwithstanding this, October marked the second anniversary of the Fund and the 46.8% return since launch serves as a useful reminder of the benefits from investing in high margin cash generative businesses that can grow faster than the market at large over the medium to long term.
At the individual stock level, Topps Tiles was one of our worst performers, with the market already concerned about the outlook for domestic consumer spending, the shares reacted poorly to news that its sales growth had slowed post BREXIT. Elsewhere, Senior warned of technical and pricing issues supplying into new aircraft programmes on top of ongoing weak trading in its non-aerospace engineering activities. GB Group also fell sharply on the back of slow progress on a major government ID verification project. On a positive note Bioventix, Games Workshop, Revolution Bars and Trifast all performed strongly after positive trading updates or results. During the month we sold our holdings in Safestyle, the replacement window business, reducing our exposure to high ticket domestic consumer spend and in Cairn Homes, the nascent Irish housebuilder. We added Convatec (a high margin global medical consumables business) to the portfolio at IPO.
The endless debate about BREXIT and the lack of clear understanding of its ramifications has created a high level of uncertainty, which markets don’t like, so despite the domestic economy so far proving to be more resilient than many commentators had expected, we have seen an ongoing flight to liquidity and safe haven assets to the detriment of UK Small and Mid caps. However, the recent surprise US election result and the prospect, from early policy indications, of fiscal stimulation, with attendant higher inflation and rates in the world’s largest economy, should cause asset allocators to question the merits of owning bonds and safe haven stocks and review their attitude to risk assets. Up next is the autumn statement with the strong possibility of the new chancellor joining the fiscal stimulation bandwagon, all at a time when the Fund's Small and Mid cap universe is in our view looking increasingly attractive on valuation.