IFSL RC Brown UK Primary Opportunities – Fund Update | December 2020

A month of further progress and performance for the Fund | 2020 – A difficult year for UK equities as we look to 2021

December can often be a relatively quiet month for fund raisings, however this month proved anything but. November’s positive vaccine news has given economies a way of out of the destructive lockdown cycle, and we have seen an acceleration in companies looking to raise capital for expansion purposes that we anticipate continuing into 2021. Abingdon Health, Experian, HeiQ, Capital Limited, Venture Life, Aveva, Bytes Technology and Ecofin US Renewables Infrastructure were added to the portfolio.

The UK became the first country to approve and commence the roll out of the Pfizer/Biontech vaccine. The UK’s own Astrazeneca vaccine has also been approved and roll out has commenced in early January.

A trade deal between the UK and EU was finally agreed at the 11^th hour. The UK market and sterling reacted positively as it prevents the uncertainty and potential disruption of ‘no deal.’ Nevertheless, with a likely double dip recession, the impact of further lockdowns and the time it will take to roll out vaccines, it will take some time for the UK economy to recover to some semblance of normality.

The recent market rise suggests a return to normality, or at least the new normality, is only a matter of time; we do not disagree, but we feel given the sharpness of this rally, equity gains may be more muted in 2021 than many believe.  What is clear to us is the valuation gap between the UK and other developed markets. We expect this to narrow over coming years and the UK market, given its international nature, is well geared to a global economic rebound. The trade deal with the EU should also provide some clarity and encourage overseas investors who have been eschewing the UK to re-enter. As active primary opportunity investors, typically investing at the time a company is raising money, we are well positioned to invest in companies seeking to expand in 2021 and beyond. Conditions provide fertile ground for active investors – those who merely participate in buying passive funds are set to miss out further.

At the start of 2020, we anticipated small-caps being well placed to perform strongly given their valuation discount relative to mid-caps that had performed so strongly in 2020. Clearly, we did not foresee a pandemic and its effects, but small-caps proved more resilient aided by their lower valuations and nimbleness to adapt to the fast-moving situation. Many small-caps are younger companies that are less exposed to the older, traditional sectors such as banking, oil & mining and high street retail. Instead, they are more likely to be involved in healthcare and online services that have been beneficiaries of the lockdown. Whilst the FTSE 100 returned -11.6% in 2020, the FTSE Small Cap index rose 7.2%, and the AIM market, home of typically smaller but fast-growing companies, gained a remarkable 21.8%.

We are excited for the prospects of our current portfolio – a well-diversified portfolio across different sectors and market capitalisations. Many have exciting growth prospects, but we believe it also important to have exposure to large, steady, dividend payers. They may not gallop, but they provide stability and valuable income. We also have a basket of Covid 19 recovery stocks – travel and leisure companies that were struck low by the pandemic and raised money to protect themselves against future lockdowns. Despite recent gains, we anticipate there is more to come when lockdowns start to ease. Importantly, we invested in those high quality companies that we believe will not only survive but thrive in the years to come as they utilise their dominant market position to increase margins and market share.

In December the IFSL RC Brown UK Primary Opportunities fund returned 6.1% compared with 3.9% for the FTSE All Share and 4.5% for the IA UK All Companies sector. 2020 saw the Fund return -2.7% compared with -9.8% for the FTSE All Share and -6.0% for the IA UK All Companies sector.

***Stock in focus***

IMImobile

IMImobile, a cloud communications software provider, has received a cash offer from US giant Cisco Systems. The shares rose over 40% on the news, aiding the performance of the Fund.

Takeovers of UK listed companies have been a feature of late as overseas buyers are attracted to UK listed companies trading at a discount to international peers whilst also taking advantage of weak sterling. We anticipate with lots of cheap money available, takeovers will continue to be a feature in 2021.

Purchases

Abingdon Health

Abingdon is a developer of rapid, lateral flow-based diagnostic tests. It was approached by the UK government to lead and form the UK Rapid Test Consortium, to design and manufacture at scale rapid antibody tests to measure population-level infection rates of Covid-19. We purchased the shares at IPO where the company raised £22m in order to increase manufacturing capacity from 25m units per year to an expected 150m by the end of 2021.

HeiQ

HeiQ (pronounced high Q), is a materials technology company. Its coatings are used by well-known clothing brands such as North Face, Gap and Burberry. Its recently launched HeiQ Viroblock, an antimicrobial covering, is expected to be in high demand as it helps stop the transmission of Covid 19 and other viruses by killing them in a matter of minutes when they come into contact with surfaces that have been treated by Viroblock. A hugely exciting, profitable growth company which provides products that are expected to be in high demand for years to come. We acquired the shares at IPO where the company raised new capital for expansion purposes. The shares are trading over 60% above their IPO price and have grown to become a top 10 holding in the Fund.

Capital Limited

Capital is a full-service mining equipment and solutions provider. Its services include the provision of driling equipment, earth moving equipment and geochemical analysis. We acquired the shares as part of a £30m fund raise to help fund a major new contract with gold miner Centamin. It is anticpated the contract will be worth in excess of $200m over four years. We consider this a material new contract which should provide further growth opportunities and allow for a re-rating of the shares. The company is profitable and pays an attractive dividend.

Venture Life

Venture is a consumer healthcare company focusing on buying brands that are no longer considered to be core by larger pharmaceutical companies, taking the manufacture in house, and breathing new life into the products. Its products include ultraDEX and Dentyl mouth washes. We acquired the shares as part of a fund raising where the proceeds will be used to acquire more products and diversify the company further.

Aveva

Aveva is a FTSE 100 technology and software company aiding clients spanning a vast array of industries to become more digitally led allowing them to gain better information on their business and in turn make better, more profitable decisions. We acquired the shares as part of a placing following a rights issue to fund the £5bn acqusition of a competitor. We consider Aveva a high quality business with attractive margins that is set to deliver further growth.

Bytes Technology

Bytes is an IT and software company providing  full-service IT services such as data storage and security to over 3000 clients in the UK. With technology investment at the fore of every business as a result of greater remote working, Bytes is well placed to continue to grow its sales to exisiting and new customers. We acquired the shares at IPO which should further raise the profile of the company and we anticipate it will soon enter the FTSE 250 following a 20% rise since its market debut.

Ecofin US Renewables Infrastructure Trust

Ecofin raised money at IPO to invest in renewable energy assets predominantly in the US. The US is considerably behind Europe in its renewable energy investment and with the election of Joe Biden who promises $2 trillion to promote renewable energy, we consider Ecofin a high quality alternatives asset manager, well placed to benefit from this growth. The shares provide stability and a forecast dividend in excess of 5%.

Experian

Experian is a global data company and one of the larger constituents of the FTSE 100. It provides services including credit scores & reports and identity theft protection to individuals and businesses. We took the relatively rare decision to purchase an initial position in the secondary market, taking advantage of sterling strength as a result of an anticipated EU trade deal which had resulted in weakness in this global earner. A high quality, dividend paying business.

Sales

With the significant number of new companies introduced to the portfolio in what was a very busy month for fund raisings, we sold a number of holdings to raise cash. When we sell out entirely of a company it is usually for one of two reasons – 1) the company has issued a profit warning or we have concerns over the future direction of the business and its market. 2) We need to raise cash in order to invest in new primary opportunities that we consider to be more attractive and can provide a greater return than what we already hold. Usually we we have made money in the stocks and the discount we purchased at due to our primary opportunities process has unwound and we do not necessarily see material future upside. We are sellers, not because we no longer think it is not a good quality company, but we believe the shares are correctly priced. We will often sell a holding to make way for a new holding that is in the same or a similar sector. Above all we like to maintain a well balanced and diversified portfolio. It is this discipline that provides the consistent returns we achieve. We are well aware parts of our portfolio will perform better than others in the shorter term.

All the sales in the month were for the latter reason – all we consider to be good quality, but the proceeds could be used to invest in new companies where we see a greater return without incurring more risk. We took profits in Polypipe (construction) and AJ Bell (financial services) which had both participated in the strong mid cap rally. We continue to hold both companies in high regard but we felt Polypipe’s sharp rally had gone far enough, and AJ Bell we anticipate will provide further primary opportunities for us to re-enter should we wish at potentially a lower level. CentralNic, an internet domain name services provider, a small company, was also sold for good profits, the proceeds used to invest in new technology names Bytes and Aveva. Primary Healthcare Properties was sold as despite being a high quality, stable name, it is likely to underperform an economic recovery and rising market.

DS Smith (paper & cardboard manufacturer) and Gateley (law services) were both sold following good share price recoveries but in truth had been unexciting performers and we see the potential for more attractive returns elsewhere.

Please be advised that the past is not necessarily a guide to future performance. Investments and the income derived from them can fall as well as rise and the investor may not get back the amount originally invested.

Cumulative Performance (Total Return %) – December 2020

Fund/Benchmark Name	3M to 31/12/2020	6M to 31/12/2020	Year to 31/12/2020	3 Years to 31/12/2020	5 years to 31/12/2020	Since Inception (28/05/1997)
IFSL RC Brown UK Primary Opportunities P Acc	19.2	14.7	-2.7	7.3	46.0	425.6
Quartile Ranking IA UK All Companies	1	2	1	2	1	1
IA UK All Companies	15.3	14.2	-6.0	2.0	28.9	266.7
FTSE All Share	12.6	9.3	-9.8	-2.7	28.5	260.4

Source: FE: 31/12/2020

Cont.

Discrete Annual Performance (Total Return %) – December 2020

Fund/Benchmark Name	Year to 31/12/2020	Year to 31/12/2019	Year to 31/12/2018	Year to 31/12/2017	Year to 31/12/2016
IFSL RC Brown UK Primary Opportunities P Acc	-2.7	18.9	-7.2	19.4	14.0
Quartile Ranking IA UK All Companies	1	3	1	1	2
IA UK All Companies	-6.0	22.2	-11.2	14.0	10.8
FTSE All Share	-9.8	19.2	-9.5	13.1	16.8

Source: FE: 31/12/2020

The past is not necessarily a guide to future performance. Investments and the income derived from them can fall as well as rise and the investor may not get back the amount originally invested. R.C. Brown and Marlborough are authorised and regulated by the Financial Conduct Authority. Marlborough Fund Manager are the ACD. The Key Investor Information Document and the Full Prospectus can be obtained via www.marlboroughfunds.com or by request at: info@rcbpo.co.uk