Discretionary Unit Fund

Fund overview

The investment objective of the fund is to provide maximum appreciation with above average yield for a growth fund. It is envisaged that the fund will normally be fully invested subject to market considerations. The Scheme is to concentrate on smaller and medium sized UK companies. The policy does not envisage hedging either against price or currency fluctuations. Smaller and medium sized companies display characteristics of lower liquidity and investors should therefore recognise that the Manager reserves the right to control the rate of investment of new monies.

Investment manager’s report for the year ended 30 April 2018

After delivering mid-teen returns in 2016-17, the market softened in the year ending April 2018. The FTSE 100, FTSE 350 and the FTSE AllShare were up around 4% while the FTSE SmallCap was up 6%. The Fund posted marginally higher returns of 6.3%, after fees.

However, it should be emphasised that we are bottom-up stock-pickers and weigh companies on their merit, not whether they are part of any index. Hence we were not invested in Carillion when many ETF’s were. Compared to index constituents, we believe our portfolio companies are of a higher quality and offer a more promising outlook because they are adapting and innovating. In their presentation, Macfarlane Group summed it up well “Customers’ expectations are never static.......yesterday’s WOW quickly becomes today’s ordinary”. One recent Google report mentioned that search for “best paper towels” was up 170% over the last year -- reminding companies that consumers want only the best, even when they are choosing basic products.

More importantly, we get more intrinsic value per invested pound because we are disciplined about what we pay. In the short term, the market can behave speculatively and deliver “good” performance but over time we expect our disciplined approach to outperform the indexes.

Investment Approach

Our priority has been and remains: safety of capital. Warren Buffett wrote in his 1989 letter, “the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs”.

What we seek is good quality companies led by great managers that will compound over time. What we do not need i.e. speculative companies without a sustainable business that look good on “technical charts”.

What we also do not need is – growth for the sake of it. Conviviality Retail managed to destroy £330m of shareholder value – beaten only by Carillion (£1.3 billion), after pursuing a volume rather than value strategy. The good news is that we escaped; the Fund was not invested in Conviviality or Carillion but there are lessons to be learnt nonetheless:

Firstly, we believe big companies are not always as safe as we perceive them to be. At a time when the market is changing rapidly, the structure and bureaucracy of larger companies decreases the required agility to adopt. Smaller companies on the other hand are generally more nimble, able to manoeuvre and change direction quickly.

Second, our observation is when managements have their family wealth in the business, they think like partners. Since ownership influences decision making, it is important to us that company managers are invested alongside us.

A fond farewell

Two of our portfolio companies, Fenner and Laird, received bids at premiums of 30% and 72% respectively. We attended the Fenner AGM in January and were quietly accumulating its shares. In March, Michelin announced an unexpected cash offer and the stock price immediately soared. If stock market participants incorrectly value a great company, savvy corporate buyers will bid and capture the value for themselves. Such premium offers also provide one important “non-financial” gain : it encourages us that our method of studying and valuing companies is more aligned to corporations, who are strategically minded, rather than stock market participants who are often focussed on daily stock price movements. It is in our view, a positive validation that we are in the right company and on the right track.

Portfolio Purchases

In general, companies across a number of sectors are facing an increasingly complex and intrusive compliance burden, coupled with higher costs of operating to new standards. SimplyBiz Group simplifies complex rules & regulations (such as GDPR, MIFID etc.) for more than 3000 small financial firms. Unlike large firms, many smaller companies cannot afford a full-time compliance officer but nonetheless need to be compliant. SimplyBiz does not take any regulatory risks and its business model is based on “make once and sell many times”. Growth will capture higher margins, a nice way to benefit from scale. We invested in this solid business because it is led by a management team that is first-rate and ambitious. The company’s knowledge and the potential network effect, which is yet to come into play, means the current revenues at £44m are very small compared to the size of the market. With an ownership of 49%, this committed management team will fully participate on the upside value they deliver for shareholders.

In the current market, we are constantly ploughing more time and effort to find mis-priced companies. One such opportunity is the Lighthouse Group Plc, a leading IFA business. Over the last few years, this management team has delivered a superb turnaround and successfully moved beyond the traditional network offering. The company has grown its affinity business, which now has access to 6 million retail investors. There are not many IFA’s who can access 6m investors at a flick of a switch and in our view this company has never been so heavily embedded with value. After buying an initial position in November 2017, we further increased our holding in April 2018. We are able to buy shares in excellent companies, in decent size, because we enjoy good relationships with a wide network of outstanding brokers, to whom we say a BIG THANK YOU for their help and expertise.

Had we purchased the Lighthouse shares in dribs and drabs we might have chased the price up, even perhaps reported a higher NAV and an impressive “performance” for the month ended April (while foolishly paying more for the acquired shares). Such short-term thinking is not our style. Rather, our focus remains on delivering compounded gains over the long term. In fact, when we are accumulating shares – ironically as it may sound – we want weaker prices so we can buy cheaply. The market, is general, is fickle and very short term driven and we believe our long term approach provides a meaningful advantage.

Going forward, stock selection will become even more important. We are constantly meeting and evaluating companies and shortlisting outstanding businesses for investment. Our style is a mixture: we wait and exercise patience but when an appropriate opportunity arises, we move fast.

The Fund was born on August 8th, 1963 and is therefore almost 55 years young. More than five decades on, our task remains the same: finding good companies run by extraordinary managers, not over-paying and keeping the portfolio turnover to a minimum so that we do not disturb our “compounders”.

How to invest and further information

To deal in the units of Thornbridge Discretionary Unit Fund please call Maitland Institutional Services Ltd on +44 (0)345 305 4216.

Further information and forms are available from Maitland Institutional Services Ltd at www.maitlandgroup.com/fund-info/the-mi-discretionary-unit-fund/ or call +44 (0)345 305 4216.

For further enquiries on the Discretionary Unit Fund please contact James Bedford at Thornbridge Investment Management on +44 (0)20 8004 3275 / james.bedford@thornbridge.com