Our best performers in July were all technology stocks. Boku (software to enable online subscriptions to be paid through mobile phone bills) rose on a positive trading update and dotDigital bounced back strongly after a period of underperformance, caused by client spending slowing around the introduction of GDPR, as the company reassured on a resumption of growth. Finally, both IMIMobile and SDL performed well on the back of earnings enhancing acquisitions. On the negative tack, Wilmington fell back when it warned that recent investment in its business had failed to stimulate the commensurate pick-up in sales, and Proactis remained weak in the absence of any newsflow, with investor confidence still shaken by the surprise profits warning in April. Finally, Equiniti’s share price remained under pressure, despite the company stating that 2018 profits were likely to be at the top end of market expectations. Equiniti has high levels of repeating revenues and we feel the shares are oversold, but with heavy investment in its US acquisition putting short-term pressure on cash flow, it may lack a catalyst for a re-rating in the immediate future.
On the trading front, we took some profits in more highly rated stocks, such as IMIMobile, which has enjoyed a significant re-rating at a time when its cash conversion has deteriorated due to high levels of capitalised development cost. We exited our holding in Melrose Industries, following its promotion to the FTSE100 index. We added a holding in Future, a B2C technology publishing business, after it announced a proposed acquisition of an online US publishing business, which gives it a leading market position in that geography. We also bought a holding in CentralNic, an internet domain name services business with high levels of recurring revenues, by participating in a placing to finance a significant acquisition.
As we move through the year, the market’s direction has become increasingly hard to read and volatility has picked up. Concerns at the beginning of the month centred on Trump’s trade war rhetoric and actions, but after his more conciliatory meeting with Claude Juncker, the market has reverted to fretting about the direction of interest rates. At the Mid to Small end of the market, where the Fund invests, the constant stream of fund raisings has started to impact on institutional liquidity and undermine secondary market prices. This scenario coupled with higher levels of individual stock volatility is throwing up quite a high number of investment opportunities at attractive valuations from our screened universe of cash generative stocks with high levels of revenue visibility.