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Performance	Six months	1 year	3 years	5 years	Since launch*
Slater Recovery Fund P unit class	-4.87%	+0.06%	+21.08%	+57.99%	+425.04%
Investment Association (IA) OE UK Equity Income	-15.17%	-9.31%	-7.76%	+5.90%	+244.37%

*A unit class launched 10 March 2003

Past performance is not necessarily a guide to the future. The value of your investment can go down as well as up; you could receive back less than you have invested.

Overview

These were six tumultuous months. They began with an exuberant, even frenzied, advance in the fourth quarter. That celebration came to an abrupt end once COVID-19 struck. The impact on the United Kingdom has been both damaging and frightening but ultimately is becoming familiar and tedious. This has been reflected in the stock market which enjoyed an explosive rally from the lows in March 2020 before getting bogged down in recent days. We have a contest between central banks and governments expanding the money supply and investors’ concern about weak profits. Historically money supply has won this battle.

Commentary

Normally we closely review the news flow and price action of our investments but this has become less useful when they are all being punished or rewarded collectively. Even so, we present here a brief summary.

Major Contributors	Contribution
Codemasters	1.15%
Liontrust	0.72%
Future	0.55%
Dart	0.50%
Gamesys	0.50%
Venture Life	0.48%
CentralNic	0.43%
Sureserve	0.36%
JTC	0.34%

Codemasters rose +31% after a busy six months. This started with the £20 million placing in late November 2019 which funded the upfront element of the £152 million purchase of Simply Mad Studios (SMS). The rest will mainly be paid from SMS’s earnings before interest, taxes, depreciation and amortisation (EBITDA) over the following three years. We took part in the placing. A trading statement in April 2020 said the year to March 2020 had ended strongly, with revenues of £76 million, up from £71.2 million in 2018/19. Adjusted EBITDA was £18.1 million and ahead of forecast, despite a £0.9 million loss at SMS. The company’s profits are heavily influenced by when it launches new versions of its major titles. Though the business has seen some disruption, the lockdown has probably been a net benefit. No Formula 1 to watch? Not a problem, play it online instead or watch e-sports.

Liontrust Asset Management gained +29%. It has been a stellar performer thanks to a canny series of acquisitions of teams and businesses combined with effective fund management and distribution. Assets under management (AuM) at 31 March 2020 were £16.1 billion, up 27% over the year. This benefited from a gross inflow of £2.7 billion. Sustainable investing accounted for £5.1 billion of total AuM. Back in June 2017, sustainable AuM was £2.6 billion. The shares fell sharply with the market but recovered almost as quickly.

Future rose +4% and maintained its earnings guidance. Magazine sales have suffered during lockdown but digital growth has compensated. Last year’s purchase of TI Media has increased the proportion of sales from magazines but it was based on converting this to digital income, while the expected £15 million of synergies covered the inevitable decline of magazine sales. The company says that lockdown has simply accelerated plans. We remain very confident of its prospects.

Dart is a new addition to the Fund. We took part in its £172 million placing on 21 May 2020 at 576.5p. The shares closed the half year at 819p. The company runs the Jet2.com airline and package holiday business. It has been very well managed and has grown relentlessly. We expect a swift recovery from the virus.

Gamesys, the online bingo and casino operator, has been a winner from coronavirus. Use of its chatroom rose 24% during lockdown and the company has burnished its social credentials by stopping advertising on TV and radio. This also saved it money, of course. The company seems to be handling tighter regulation pretty well and it has avoided fines and censures. The shares rose +24% and closed the period on a price to earnings ratio (PE) of only 6.6.

Venture Life had a rocky start with the Fund but in the last six months has rallied strongly, rocketing +120%. Final results in April 2020 were satisfying, showing adjusted earnings per share (EPS) of 2.18p, up 6%. This may not sound impressive, but it represented a big catch-up from first half numbers weakened by an absence of orders from China. In April 2020, Venture announced a €168 million order from China for mouthwash and other products, including €7 million to be delivered this year. This was a startling but massively welcome piece of news. We expect serious upgrades to forecasts in due course.

CentralNic gained +48%. It reported a 43% rise in EPS for 2019. The company has also heavily upgraded its senior management to give it a platform for further expansion. The revenue is almost entirely recurring so the business can support higher than normal levels of debt. The management upgrade should also allow a faster pace of organic growth.

Sureserve announced its interim results to March 2020 on 27 May 2020. They were worth waiting for. Adjusted EPS rose 29% and the company paid its final dividend at a time many others were cancelling theirs. The company is well placed in a climate of generous public spending.

JTC gained +20%. Its revenues are not tied to market levels and they are contracted for several years in advance, so this is a safe port in a storm. Results for 2019 showed a rise in underlying earnings of 16%. The acquisition of NES Financial for an initial £32 million marked a long-planned entry in the domestic US market. NES brings some slick reporting products which will be used across JTC.

Major Detractors	Contribution
Next Fifteen Communications	-0.90%
IWG	-0.84%
Ten Entertainment	-0.69%
STV	-0.65%
Randall & Quilter	-0.63%
Avation	-0.63%
Marston’s	-0.58%
Prudential	-0.53%
Arrow Global	-0.46%
Restore	-0.45%
NCC	-0.39%
Trifast	-0.35%
Flowtech Fluidpower	-0.34%

Detractors fall into two categories: companies directly impacted by the virus and those affected by a risk-off move by the market, typically financials.

Trifast and Flowtech Fluidpower are both specialist industrial distributors and they fell by -36% and -37% respectively. Trifast’s move into the automotive sector was ill-timed and it has been punished for it. Flowtech is domestically focused, adding to its problems, but it is streamlining its network of warehouses, which should result in substantial savings. Detractors fall into two categories: companies directly impacted by the virus and those affected by a risk-off move by the market, typically financials.

NCC issued a cautious statement in March 2020, citing deferments of larger cyber security projects by customers. This fits with a general picture of longer-term IT work being set aside while businesses adjusted to remote working. The shares fell -26% but we remain confident in the company’s prospects.

Restore fell -17%. It had to suspend the bulk of its shredding division but the rent on documents stored with it continued regardless. The share price became over-exuberant last autumn but is now behaving sensibly.

Ten Entertainment, down -33%, and Marston’s, down -51%, are very direct casualties of lockdown. We supported Ten in a small fundraising and remain very confident it will bounce back. It has already worked out plans for operating profitably with only half its bowling lanes in use. Marston’s delighted the market on 22 May 2020 by announcing a joint venture (JV) with Carlsberg’s UK brewing operations. This delivered £273 million of cash and still left the company with 40% of a JV valued at £780 million. Marston’s believes its pubs can operate profitably even if social distancing requires volumes to fall by nearly 50%.

STV, down -37%, a direct casualty of the virus. With the public kept at home, many advertisers slashed their campaigns. We expect life to return to normal later in the year.

Avation is an indirect casualty and it fell -32%. The great bulk of its airline customers are honouring their leases. Where insolvency does occur the lessor can immediately secure the plane and wait for better times. Rates will doubtless be lower going forward until travel demand recovers. Understandably, Avation abandoned its sales process.

Less direct sufferers from the virus include Arrow Global, down -63%, Next Fifteen Communications, down -27%, and IWG, down -28%. Arrow has in fact seen only a modest impact in collections, but the market has assumed near-insolvency. The shares are highly leveraged and therefore very volatile. The company is amassing a €2 billion investment fund to buy non-performing loans for clients. So far it has decided conditions are not yet right to put this money to work. When it starts to buy, its shares will react very strongly as this will mark the next cycle in non-performing loans. Arrow’s best vintages for loans were those bought between 2009 and 2011.

Next Fifteen fell -27% on the most slender evidence of trouble. In April 2020 it reported January 2020 year-end earnings rising 5%, which was low by its standards and reflected problems with a couple of contracts that predated Covid-19. It warned investors to expect some impact from May 2020 onwards but was unable to assess the scale. Marketing is usually an easy budget cut, so the caution is understandable.

IWG, the serviced office group, tumbled -28% despite the fact it looks like a structural beneficiary from the virus. Its clients typically lease for 18 months but there will have been some impact in the ancillary fees for hiring meeting rooms. The big surprise came on 27 May 2020 when the company announced a £320 million placing. This was to provide a war chest for buying weaker competitors. The virus has clearly set back IWG’s programme of selling its 3,000 centres to franchise partners. The rise of home working has also raised concerns. But after two months of lockdown there seems a wide enthusiasm to return to face to face working. Serviced offices, with their inherent flexibility, look well placed.

Prudential shared in the carnage among financials, halving between mid-February 2020 and mid-March 2020. The shares were bought during the six months, some before and some after the crash. On average the loss was 14%, which compares to a fall over the full six months of -24%. We bought Prudential in order to tap into the surging wealth in the Asian markets it serves. The unrest in Hong Kong has grabbed headlines but the company’s business there remains buoyant, growing 24% last year. But this still only contributed 12% of Asian income, reflecting the good spread across the region. Meantime Prudential is working on the float of its US operations, which produce just under half of operating profits. Initially it will sell a minority stake, but the direction of travel is clear.

Randall & Quilter fell -28% yet is in fact scarcely affected by the pause in the economy. It says it is seeing a rush of new business as companies seek to clear their books of legacy assets. As a financial, like Arrow Global and Prudential, it suffered collective punishment during the panic.

Outlook

The old saying ‘Don’t fight the Fed’ is being amply borne out this year. Just as the autumn of 2018 was dire for shares as the Federal Reserve tightened, in current markets the ultra-easy has enabled a powerful rally. No change to these conditions seems in prospect. In normal times a run on a currency might follow, but as all major central banks are engaged in similar pump priming, it only leaves assets to rise versus money in general.

Purchases and Sales

During the six months we bought Breedon Group, Countryside Properties, Dart, Hollywood Bowl, Inspired Energy, MJ Gleeson, Prudential, Rank, Renew and Scapa Group. We added to AFH Financial, Alliance Pharma, Arrow Global, Clinigen, Codemasters, Franchise Brands, Future, Gamesys, Hutchison China MediTech, Iomart, IWG, Kape Technologies, Kin and Carta, NCC, Next Fifteen Communications, Randall & Quilter, Restore, STV, SimplyBiz, Ten Entertainment, Tesco and Venture Life. We sold Aggregated Micro Power, Amerisur Resources and Entertainment One, all of which were subject to takeovers. We also sold Smartspace Software and reduced the holding in River & Mercantile.