December was a strong month for the UK equity market following the approval of the Pfizer Covid-19 vaccine and beginnings of the UK vaccination programme. This positive news on the vaccine offset a more difficult short-term backdrop with many UK businesses again forcibly closed in order to curtail the spread of the virus.

Within the portfolio the largest contributor to performance was Ilika, which designs and produces solid state batteries for a wide range of potential end markets including domestic appliances, medical and automotive. Ilika had no material news during the month, but there is heightened investor interest in alternative energy and the market capitalisation remains low relative to other solid state battery companies. Other strong performers included a number of the industrial holdings including Senior, Morgan Advanced Materials and Redde Northgate (none had material news, the shares continued to recover on the expectation of a cyclical earnings recovery in 2021 and beyond). Among the largest detractors was insurer Hiscox, as the return to UK ‘lockdown’ means that there could be a repeat of the business interruption claims seen in Spring (albeit on a lesser scale as each month ~8% of all policyholders get moved to new terms where losses from Covid-19 are no longer covered).

Transactions during the month were modest, but two new small cap positions were started in Vertu Motors (car dealerships) and Finsbury Food (a supplier baked goods such as cakes for supermarkets and coffee shops). In both cases the valuation is low on a recovered earnings basis compared to where they have historically traded, and they have experienced management teams.

The return to lockdown in the UK will mean the earnings recovery for domestic companies exposed to, for example, the hospitality industry is pushed back later into 2021 and onwards. The equity raises many companies undertook in Spring 2020 largely means that those most affected will not require further funding, therefore we are not anticipating widespread balance sheet pressure. The debate will be to what degree the equity market ‘looks through’ a further few months of businesses being in some cases forcibly closed. We are currently reviewing those most affected within the portfolio to determine whether there remains attractive upside despite a more prolonged period of suppressed earnings.


Cyclical earnings: earnings generated from a defensive stock; one that provides a consistent dividend and stable earnings regardless of the state of the overall stock market or economy