Performance over the quarter has been challenging for our portfolios, following the Referendum result on 23 June and the subsequent market volatility. Britain’s exit from the EU single market prompted sterling to fall substantially amid concerns about economic growth in the UK and abroad.
Domestically sensitive stocks have been already adversely affected due in part to a hiatus in corporate spending and investment stalling economic growth. Given the uncertainty surrounding future Brexit negotiations and the “known unknowns” of the outcome, the AIM market will show increased volatility and execution risk.
This initial Brexit shock has adversely affected our holdings as 66% of their combined revenue is generated within the UK. Companies such as Vertu Motors have seen their share price fall 24% and Telford Homes fall 17%.
In addition, we have experienced a Brexit related profit warning from Portmeirion shaving 20% off the value of the shares. We are attending a site visit at Portmeirion shortly to gauge a better understanding of the business and the implications of Brexit.
Our financials exposure has also been de-rated post Brexit. Polar Capital Holdings and Numis have fallen on concerns over the passporting of financial services in a post Brexit world and a reduction in market related transactions. A possible fall in UK interest rates is detrimental for banks and this has implications for the likes of Arbuthnot Banking.
The slump in sterling was a shot in the arm for foreign currency earning sectors like oil and mining which influence the stockmarket benchmark indices but have little relevance to our model because many resource stocks do not pass our stock qualification criteria.
On 15 July Stanley Gibbons announced the exit of their Chief Executive and Chief Financial Officer as part of its ongoing repositioning. The planned £5 million in cost savings had been exceeded. A concern is the announced review of past accounting regarding the recognition of revenue in its philatelic trading business, particularly some investment plans that had been offered by the company in earlier years. This would result in a reduction in SG’s underlying NAV and the shares have fallen below the 10 pence open offer earlier this year.
On a positive note, those securities that have little or no UK domestic earnings exposure have benefited from a fall in sterling. Abcam and Advanced Medical Solutions have performed strongly whilst Cohort, Nichols and RWS Holdings are all trading positively.
At the beginning of July, we embarked on a visit to James Halstead Plc, a manufacture of PVC flooring, at their site in Radcliffe, Greater Manchester. There is a very good chance that you have walked on their vinyl flooring which is used extensively in hospitals, schools, airports or indeed anywhere where footfall requires a hard wearing surface.
We asked Gordon Oliver the Finance Director how Brexit would affect the business. He was fairly sanguine about its immediate effects and he revealed a company keen to explore the benefits of a post-Brexit trading opportunities. They already trade in 92 countries. Indeed, he did point out that Halsteads, in their 100-year history, has successfully coped with two world wars, several recessions and a global financial crisis.
Food and beverages remain a key driver of portfolio returns. On 18 July Conviviality Group, that trades under the brand Bargain Booze, issued a very strong trading statement driven by their recent acquisition of drinks retailer Matthew Clark. Finsbury Food, manufacture of ambient cake products issued a solid profit forecast driven by a good growth in the first half of the year continuing into the second half. They are also confident that they can navigate their way through Brexit.
In conclusion, whilst the past quarter has been challenging, it follows on from periods of material benchmark outperformance and clients should hold a longer term view.
We will remain vigilant in our stock analysis and will make changes to the model if required.