The fact that the fund’s performance in January was flat is a little disappointing when compared to the index being up by 2.9% in the month, almost all the underperformance was due to our biggest holding, a retailer, being down by 19% - more on this stock below.

The rest of the portfolio performed well and we were also able to find 2 new investment ideas in the month to make the portfolio 17 names at month end. One of the stocks is a niche global internet security software company that has just moved into profitability, has 75% of its market capitalisation covered by net cash on the balance sheet and is consolidating a complementary acquisition. The other new stock is one which we have followed for several months and have been waiting for its price to fall within our buying target range.

Whilst we did not fully close any positions during the month, 2 holdings were reduced by 3% each as the price of one approached our price target and the price of the other was significantly inflated by takeover speculation. We were also able to add 2% to a long term holding when its trading statement was taken badly by the market and the stock price temporarily fell.

The retailer which started the month as our biggest holding (and ended the month as our 2nd biggest holding) had actually traded better than market expectations over the important Christmas period, with like-for-likes roughly inline with last year, but announced the probable loss of a distribution contract for Tesco in 12 months time. This contract makes up about 45% of the turnover of the wholesaling operation and will impact annual operating profits by about £10m if it is not replaced. Having spoken with the Finance Director, we understand that there is good reason to believe the contract will be replaced with a number of smaller contracts distributing the same or extended product lines. Given that £10m represents 16% of operating profits, it is perhaps understandable that the stock price declined as the future became less predictable.

However, the retailer will have ended January with net cash of about £140m, a market cap. of £450m and expected annual cash generation capacity of £60m+ before payment of dividends. So, whilst the unexpected loss of a major distribution contract is a big disappointment, we still see the stock to be significantly undervalued by the market and it remains our second largest holding.

Let me know if you want any more detail,

Best regards,

Chris Broadhurst
CEO