Fund manager update

Market in focus

February saw equity markets regain more of the ground lost in the final quarter of 2018. The MSCI UK Index generated a total return of 2.3% and the Numis Alternative Markets Index fell by 0.7% after a strong recovery in January. On average, portfolios in the Service returned 1.3%, cementing a solid start to the year. Expectations for global growth have lowered, reducing the pressure on central banks to tighten monetary policy, while the mood music from Sino-US trade talks has provided further encouragement to investors. Corporate earnings have been subdued against this backdrop, with the number of profit warnings on the rise, particularly in the leisure and retail sectors. The recent recovery in share prices sits at odds with deteriorating economic data, underscoring our view that the direction of equity markets will continue to be defined by central bank policy decisions. Although UK equity valuations do not appear to be stretched and the vast majority of portfolio companies have traded well, we enter the important month of March with a cautious attitude to capital allocation.

The key contributors to performance included M&C Saatchi (+27.0%), which noted that growth would again outpace its peers and would be in line with expectations, Augean (+19.6%) where final results displayed strong cash generation, prompting upgrades, while FW Thorpe (+12.2%) has recovered some of the ground lost in 2018 and Strix Group (+11.8%) announced a small water filtration acquisition. The main detractors from performance were Amino Technology (-23.6%) which announced plans to exit its low margin hardware activities, Zytronic (-11.6%), which paid out a 15.2p dividend, and OPG Power Ventures (-9.5%), where management noted that it had closed one of its 4 plants to carry out unscheduled repairs to a turbine but that trading would be in line with expectations.

Company in focus: Johnson Service Group

The company is the leading supplier of workwear and protective wear in the UK with over 40,000 customers, offering these services through the Apparelmaster brand. The Group also provides premium linen services for the hotel, catering and hospitality markets, and high volume hotel linen services through the Stalbridge, London Linen, Bourne Textile Services, South West Laundry and Afonwen brands. The business has consistently invested in its infrastructure to deliver a high-quality, reliable service to its clients.

Operating in a consolidating market with two main participants, the business has performed well over the last five years both as a result of acquisitions and organic growth. This saw forecasts upgraded twice during the last year. The Board continues to invest in production capacity to meet demand; this was complemented by the £15.5 million purchase of South West Laundry, which opens up a new geography as well as offering a completely refurbished site. The high levels of customer retention, productivity improvements and the rate of new business wins give us confidence that the investments made will see the Company profitably grow market share in the coming years and that this will be reflected in the share price.

Important information

This article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients.  Please note there is no guarantee that the CITS investment objective will be achieved. The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.

Specific information
CITS is a tailored discretionary investment portfolio management service that invests in both the Alternative Investment Market (AIM) and NEX Exchange (NEX) markets, with the benefit of major tax advantages introduced by the Chancellor of the Exchequer in his budget of March 2000. CITS is an Inheritance Tax mitigation service based on current tax law and practice. The tax treatment depends on the individual circumstances of each client and may be subject to change in the future. CITS invests in ‘qualifying shares’ in smaller companies which may be more volatile than investments in more established companies. Such companies can be subject to certain specific risks not associated with larger, more mature companies. Consequently this can make the CITS portfolios more volatile as the value of an investment may fall suddenly and substantially. CITS is considered suitable only for informed and experienced investors.