The trust’s net asset value declined in September, in another weak and volatile month for equity markets.
As had been the case in August, the portfolio’s US stocks were amongst the weakest performers, as sentiment towards US biotech remained sour. Given the way that the sector has traded this year, with very strong performance in the first half, the sell-off is perhaps unsurprising. We have, however, been disappointed that stocks such as Prothena and Northwest Biotherapeutics, have become so embroiled in it – the valuation attached to their shares is very far from the bubble-like levels that some of its peers have reached. Although sentiment towards the US biotech sector clearly remains fragile, we have seen no fundamental developments to disturb our confidence in the long-term investment case for either business. We have had management meetings with both of these companies in recent weeks.
Another disappointing performer during the month was Allied Minds. The stock’s sharp underperformance was due in large part to an opportunistic attack from a short-seller using a self-generated piece of research, which the FT described as ‘strangely shallow’. Although this has been unsettling for market sentiment in recent days, we see nothing fundamental to concern us. Indeed, our confidence has increased in both the long-term potential of its existing portfolio of maturing technology businesses and in the management team’s ability to identify new value-creating opportunities from its relationships with the best research institutions in the US.
Elsewhere, ReNeuron and Circassia both declined after their recent equity offerings but, in both cases, we remain very attracted to the long-term opportunity. Meanwhile, RM2 International, the disruptive international pallet business, weakened towards the end of the period after announcing that minor modifications are required to the coating applied to its pallets. This has resulted in delays to its production upswing. The company also announced a share placing to raise additional capital.
More positively, polymer technology business Revolymer performed well with interim results released during the month highlighting the good progress made in the last few months. The company has recently announced deals with major global chemical businesses, Solvay and OCI Chemical. We believe these deals represent significant endorsements for Revolymer’s encapsulation technology in laundry, dishwashing and other cleaning agent applications.
Other notable positive contributions came from Benchmark following its acquisition of a Norwegian business which strengthens its position in aquaculture genetics, and water-purification technology company Halosource, following positive interim results.
There was no portfolio activity during the month but we continue to expect to be fully invested by the end of 2015.
Although September was a disappointing month in performance terms, we retain absolute conviction in the long-term outlook for the trust and wish to remind investors of the long-term nature of this investment vehicle. We have invested in some incredible businesses with massively disruptive technologies and high growth potential. Some of these businesses may take a long time to fulfil their potential but the stock market is not well endowed with patience, particularly in volatile conditions. Periodically, this manifests itself in share price weakness, especially in businesses with no earnings or dividends and relatively limited market liquidity.
Share price weakness in listed early-stage businesses tends, therefore, to reflect this lack of patience from investors, not a lack of fundamental progress by the companies. Therein lies the opportunity for patient capital to exploit. The portfolio is in excellent shape and we continue to view the future with great confidence.