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Quarterly Fund Update – March 2020

‘Unprecedented’ is a word that has slipped into our collective vocabulary largely unnoticed these last few weeks, but with good reason: much of what has played out in markets and in our day-to-day lives over the last month has no directly comparable equivalent without going back many decades.

The table below summarises the return of the AIM Global High Conviction Fund for the current financial year as at the end of March.

On a rolling one-year basis, the fund delivered a return of +6.38% compared to a benchmark return of +2.10%.

Our focus on owning highly cash generative businesses with very strong balance sheet positions have served us very well in this period of market distress. We intend to stick with this philosophy and process; highly cyclical, highly leveraged businesses with poor returns on invested capital rarely prove good investments, regardless of how cheap they may appear.

The fund remains highly liquid. We exit the quarter with 8.7% in cash, and invested in businesses in which have ample trading liquidity. ICON PLC is the smallest business we own, with a market capitalisation of US$7.3bn on 31 March. Given that these are uncertain times, we commit to maintaining

Beyond providing you with an update on the current situation and where we think things are headed, I also want to address the impact this crisis will have on people’s lives and livelihoods.

Over the next several weeks and months, the daily headlines will not be comforting.

On the medical front, we are likely to see a spike in cases of COVID-19 – both locally and globally – as testing ramps up. Given what we now know of the disease, more deaths are unfortunately unavoidable.

The steps governments are taking to fight this pandemic will represent a major change in how we go about our lives for the foreseeable future, and will have a massive impact on businesses, large and small.

The global economy will go into recession. This recession will not be like previous recessions, where demand adjusts downwards by a few percentage points as the economy works through any excess capacity or deals with an asset bubble that needs to deflate. In many cases, there will be a virtual overnight cessation of business activity in major sectors of the economy. The impact on households will be huge.

Governments and central banks the world over are acting aggressively to minimise the length and depth of the recession by providing a liquidity buffer to absorb the immediate hit and stimulus to pave the path to economic recovery at the other end. These actions will very likely create a different set of problems down the road, but for now, the need to support society through what is effectively a simultaneous global natural disaster is the primary concern of policymakers.

I say all the above not to add to the general sense of doom and despondency. As a fund manager, I believe in the need to be realistic about the challenges we face, and act to meet those challenges. At heart, however, I am an optimist. I do not believe humanity would have made it this far if we did not have the ability to adapt to a crisis, act collectively to address it, and come out the other side. I believe we will do so again.

Society is already responding. Manufacturing businesses are rapidly retooling to create the equipment needed to support our health care professionals; new supply chains are developing to get critical supplies to households. Thanks to substantial advances in medical technology, the scientific community is moving very rapidly to test a variety of preventative and therapeutic treatments, and is moving at near record-pace in developing a vaccine.

The efforts of frontline medical personnel – heroes, all – to save lives and halt the spread of the virus are the best chance we have to decisively address the social and economic disruption as soon as possible. We owe them a tremendous debt of gratitude for the work they have done, and will continue to do.

I close by saying that the ‘here and now’ feels terrible, and things will get worse before they get better. But, in time, the situation will change for the better because of tough decisions we are collectively taking now.

For ourselves, we are spending our time on matters we can influence: closely monitoring the stocks we already own in the fund, keeping an eye out for potential new investments, and remaining available to you.

We will do our part to ensure the wealth you have entrusted to us is managed prudently, with a view to making sure it can grow and provide for your needs – now and in future.

If there is anything I or my team can help with, please do not hesitate to be in touch. We’d be very happy to get in touch via a phone call or video conference.

I wish you and your loved ones safety and good health.

Kind regards

Charlie & the AIM team

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