Fund manager commentary

29 February 2024

Comments from the Portfolio Manager

Please note that the commentary below includes historic information in respect of the performance of portfolio investments, index performance data and the Company’s NAV and share performance.

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results.

The Company returned -1.6% in February, outperforming its benchmark, the Deutsche Numis Smaller Companies plus AIM (excluding Investment Companies) Index, which returned -2.2.1

Markets continued where they left off in January, with global markets led by the Nasdaq and large cap shares. Mid-cap markets broadly underperformed, still bumping along the bottom of a protracted drawdown. Specifically, within the UK, small & mid-cap stocks continued to underperform their larger peers, but the portfolio was able to outperform the benchmark reflecting some significant stock specific wins across a broad range of longs, shorts, and overseas holdings.

The largest positive contributor during the month was a short in an animal genetics company which issued a large profit warning, highlighting falling volumes in China, where trading conditions in its beef and dairy segments remains challenging. The second largest contributor was Medpace, a US pharmaceutical services company that manages clinical trials for small and mid-sized biotech companies. Despite a 2-year long winter in biotech funding, Medpace has continued to grow 20% and take market share. Their best-in-class service, offering and ability to pick the best clients and programmes, means they have avoided the crunch that has affected many in the sector and deliver record levels of new business in all but two quarters. Biotech funding is now showing signs of inflecting and in their most recent results Medpace said they were confident that after a relatively pedestrian 2024 (15% revenue growth, 20% EBITDA margins), 2025 should see revenue growth accelerate as the industry recovers. The shares rose 36% in the month on the back of the strong results. The third largest contributor was UK investment manager, Tatton Asset Management, which rose in absence if any specific news.

Two of the largest three detractors during the month were from short positions. The largest was a short in a UK listed semiconductor company which continued to rise following better than expected results in January, plus a rising tide of AI related euphoria. The second detractor was a short in a UK listed support services company. The company received a bid for one division from Private Equity which simultaneously resolved the balance sheet issues and provided a valuation underpin for the group. The third largest detractor was XP Power, who make power supply units for various industrial applications including semi-conductor capital equipment. The company had seen weak order trends through 2023, but we were hopeful they would turn as we entered 2024. Unfortunately, de-stocking has continued for longer than expected, resulting in weak performance in Q1 and material downgrades to earnings. We do not believe that this changes the medium-term earnings power of the company, but it certainly pushes recovery out from 2024 and into 2025.

February was a positive month from a relative perspective, as we continue to try and navigate this “holding pattern” that UK small and medium size companies have found themselves in. We still retain a strong view that as inflation falls and fears of recession recede, the market will broaden out and the small & mid-cap market will witness a period of strong returns. This scenario could be very additive to performance. Despite the continued headwind of small and mid-cap underperformance year-to-date, we remain encouraged by the increasing role of stock specifics and the fact that the underlying strength in trading from our holdings is now being better reflected in share prices. The net of the portfolio remains around 109% while the gross is around 115%.

We thank shareholders for your ongoing support.


1 Datastream and London Stock Exchange as at 29 February 2024.

Any opinions or forecasts represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.

Risk: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.