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Confidence and conviction in UK smaller companies

Ken Wotton: Reflecting on the first half of 2019 has really shaped my thinking for how we are going to approach the portfolio and position ourselves for the rest of the year and beyond.

Frankly I have been quite surprised at how buoyant the UK stock market, particularly small caps, has been following the weakness of the last year. Nothing has really changed in terms of the macro economic situation, in fact some things, Brexit to name one, has actually become more uncertain. I am really expecting, as I have been for a while, more periods of market volatility, and we’re positioned to try and withstand that. By focusing on businesses that have resilience, strong balance sheets, where the fundamentals are strong and the management teams are strong, and trying to avoid some of those cyclical areas and sectors that are more prone to periods of volatility and drawdowns, we feel like we have a resilient portfolio that should be able to perform certainly better than average in that type of market environment.

In the context of Brexit its worth talking about the UK IPO market. In smaller companies there has been a significant slowdown in the volume of IPOs during 2019 versus prior years and that’s not surprising. I think the uncertainty around the economic conditions and also market sentiment has meant that many companies have chosen to delay or not to proceed with their IPOs. There are three companies that we have invested in during the first half of the year that have not had that issue. They have all had confidence for different reasons to push forward to launch onto the market. Diaceutics which is a pharma data business, Lounges a café bar roll-out concept and Argentex a corporate foreign exchange services provider. Those businesses have very little in common in terms of sector or business model, but all of them do have in common a conviction in their opportunity, desire to access the UK capital markets to help them to achieve their plans and good visibility around the fundamentals of their business. All of which drove our conviction to invest in them during this year.

Brendan Gulston: Looking forward to the rest of 2019 and beyond we are really excited about the investment opportunities we are going to see. Whilst you might think that right now is a difficult time to invest because of things like Brexit, the macro environment and the geopolitical uncertainty, we think that presents a huge opportunity for us. We are investing in SMEs, smaller companies, where the success or failure of those businesses is quite insulated from the broader macro environment and is really driven by things like the quality of management, their strategy and the market opportunity.

Ken Wotton: There are always going to be companies that fit our criteria where we can build a high conviction investment case, regardless of either the wider economic environment or market conditions and sentiment. In fact, those periods where there’s more volatility and sentiment and there may be some drawdowns in the market actually creates really exciting opportunities to find good businesses we’ve known for a long time but at more attractive valuations. I feel confident about the outlook for the second half of the year and our ability to continue to drive returns from this universal stock.