Data released in April provided an insight into how COVID-19 is impacting on the major economies around the world. In the UK and the Eurozone, manufacturing and services PMIs fell to record lows, foreshadowing a likely recession in 2020.

The world stock markets, similar to animals that hibernate in the winter and lose up to half their body weight, awoke at the start of spring.  The MSCI World Index and the S&P 500 were up by 10.8% and 12.7% respectively.  The UK, European and Asian markets reacted in similar fashion.  In the UK, the FTSE 100 was up by 4.0% in local currency terms while the indices associated with smaller companies fared much better after being pummelled in March.  The Small Cap Index increased by 9.8% with the Fledgling Index up by 13.8%.  The best performing index was the AIM All Share Index which was up by 18.8%.

While we were delighted with the 10.5% increase in our portfolio, it was not as good as the performance achieved by the small company indices.   After providing for the company expenses the net performance as reflected in the NAV was an increase of 9.5%.

As stated in previous commentaries, our investment philosophy is based on the belief that the economics of a business drives long-term investment returns. Typically, companies in the portfolio have organic growth with predictable earnings, a sustainable competitive advantage, high returns on equity, a strong financial position and an experienced and talented management team.  As owners of these businesses we are supportive of management otherwise we would vote with our feet and, to this end, we generally vote our proxies in accordance with management’s direction other than when the resolution concerns their own remuneration.  In times of business turmoil, we would not be concerned at management foregoing margin to retain talented staff or reducing dividends to shore up the balance sheet after depleting some of the reserves built up in the good times.  However, we take a dim view of management who lay off staff and reduce dividends without adopting a similar approach to executive remuneration.  We note that a few of our investee companies have cancelled the payment of the current dividend. Some of our cash has been used to acquire additional shares in Fevertree.  Cash is currently 2.3% of the portfolio.