Q1 Portfolio Update: Navigating Multiple Compression and Sector Rotation
The first quarter was defined by a ruthless recalibration of equity risk premiums. Against a challenging macroeconomic backdrop, capital rotated aggressively out of long-duration growth assets and into businesses offering tangible near-term cash flows, robust balance sheets, and pricing power.
The portfolio generated an average total return of -2.44% for Q1. While absolute returns were negative, the portfolio delivered meaningful alpha against our primary benchmarks, outperforming the FTSE AIM All-Share (-6.2%) by 376 basis points and the S&P 500 (-4.33%) by 189 basis points. This relative resilience was not an accident; it was the direct result of maintaining a barbell approach that pairs high-conviction, quality UK small-caps with defensive industrial exposure, offsetting the severe multiple compression we saw in US mega-cap technology.
Market Conditions: A Flight to Cash Flow
The broader market narrative this quarter was dictated by shifting discount rates. As the market digested a higher-for-longer cost of capital, we saw an indiscriminate sell-off in companies where the bulk of the valuation relies on terminal value. This was most evident in the Nasdaq and the S&P 500’s tech-heavy constituents.
Conversely, the UK market—and specifically the value and industrial segments—showed relative strength. However, the AIM market remains structurally challenged by poor liquidity. When sentiment turns in the small-cap space, the absence of marginal buyers creates disproportionate share price volatility, completely decoupling a company’s market capitalization from its underlying fundamental progress. Navigating this requires a strict focus on balance sheet strength and management execution to ensure our holdings can self-fund through periods of closed capital markets.
The Winners: Industrial Moats and Clinical Milestones
Performance this quarter was heavily concentrated in specialist engineering, infrastructure, and healthcare—sectors where demand inelasticity and structural tailwinds provided a buffer against macroeconomic headwinds.
Gooch & Housego (+26%)
Gooch & Housego was the standout performer this quarter. As a specialist in photonics and advanced optical components, G&H benefits from high barriers to entry and sticky customer relationships in the aerospace and defense (A&D) and industrial sectors. The market is finally beginning to recognize the latent value here. Strong order book momentum and improved supply chain dynamics are translating into margin recovery. In the A&D space, where procurement cycles are long and deeply embedded, G&H commands genuine pricing power—a critical attribute in the current inflationary environment.
Ondine Biomedical (+23%)
Ondine Biomedical perfectly illustrates the value of holding uncorrelated assets. Biotech and medical technology equities are driven by clinical and commercial milestones rather than macroeconomic sentiment. Ondine’s robust Q1 performance reflects growing market confidence in the commercialization of its photodisinfection technology. Hospital adoption of alternative infection control protocols is a structural growth area, and Ondine is navigating the notoriously difficult transition from clinical trials to commercial rollout with impressive execution. I expect the LANTERN stage 3 trial results to come out in the next 4-8weeks. This would create a big catalyst and liquidity in the stock. I hope the share price will move to 30p at the very least.
Deere & Co (+19%) and Keller Group (+15.5%)
Both Deere and Keller provided essential portfolio ballast this quarter, acting as primary beneficiaries of the market’s pivot toward tangible assets and infrastructure spending. Deere operates with an unassailable moat in agricultural machinery; its pricing power and advancing precision-ag technology stack make it a high-ROIC compounder masquerading as a traditional cyclical.
Similarly, Keller Group’s double-digit return underscores the thesis that unfashionable, heavily discounted engineering firms can drive substantial shareholder value through operational execution. Geotechnical engineering is a localized, complex, and essential service. With solid infrastructure spending acting as a macro tailwind, Keller’s cash flow generation and low valuation multiple offered excellent downside protection while the broader indices contracted.
Volex (+8%)
Volex continues to validate our investment thesis as a highly effective buy-and-build compounder. Operating as a critical supplier in the complex assembly and power products space—specifically targeting data centers, EV infrastructure, and medical equipment—Volex enjoys secular tailwinds. A mid-single-digit return in a sharply down quarter is exactly what you want from a core holding. Management’s disciplined capital allocation and ability to pass on input costs ensured the business remained insulated from the wider market volatility.
The Detractors: Mega-Cap Tech and AIM Liquidity Traps
The drag on the portfolio’s absolute performance was concentrated in two distinct areas: the multiple compression of US mega-cap technology and the liquidity-driven sell-offs in UK micro-caps.
Alphabet (-12.6%), Amazon (-13%), and Meta Platforms (-19%)
The portfolio’s US mega-cap exposure suffered as the market aggressively repriced growth. It is crucial to separate share price action from underlying business fundamentals here. Alphabet, Amazon, and Meta did not suddenly become poor businesses in Q1; rather, they fell victim to a tightening liquidity environment that penalized long-duration assets. When the risk-free rate rises, the present value of future cash flows contracts. While the drawdowns are frustrating, these companies possess fortress balance sheets, immense free cash flow generation, and dominant market shares. We are comfortable holding these through the current valuation reset.
Journeo (-23%) and GetBusy (-19%)
At the other end of the capitalization spectrum, our UK small-cap software and technology holdings took a beating. Journeo and GetBusy suffered from the classic AIM liquidity trap: when risk appetite evaporates, bid-ask spreads widen, and even small sell orders can crater a share price.
In these situations, the analytical task is determining whether the sell-off is a warning sign of deteriorating fundamentals or simply a buyers’ strike. For software businesses like GetBusy, investors are currently demanding immediate profitability over top-line ARR growth. While the market’s impatience is a short-term headwind, as long as customer churn remains low and unit economics remain viable, the intrinsic value of these businesses remains intact. I will be monitoring their upcoming trading updates closely to ensure the fundamental investment cases have not drifted.
Portfolio changes
During Q1 I exited my positions in Alumasc(start of the year around 260p) and Hilton Foods(around £5) and Cordel. Alumasc is having a change in leadership as well as fairly high H2 expectations which I suspect might not materialise. Hilton, was on my radar for liquidation following several profit warnings. I started selling prior to the recent trading update and liquidated my entire holding a couple of days ago. Likewise with Cordel, I got quite disappointed with the pace at which the company is moving so sold my entire holdings. Most of the proceeds as well as spare cash went into topping up MSI, Journeo, Ondine. I also initiated positions during the quarter in MTI Wireless(MWE) as well as Salesforce after the recent sell off. I will write some notes in the coming weeks on both names.
Looking Ahead
Q1 was a rigorous stress test for the portfolio’s asset allocation. The outperformance against the benchmarks validates my strategy of anchoring the portfolio with cash-generative industrial and specialist engineering firms while maintaining exposure to asymmetric upside in biotech and technology.
Looking to the rest of the year, I expect the market to remain highly selective. The era of a rising tide lifting all multiples is over; we are now in a stock-picker’s market where alpha will be driven by rigorous fundamental analysis, sum-of-the-parts valuations, and identifying companies with the pricing power to defend their margins. I will continue to use indiscriminate sell-offs in the AIM market to add to our highest-conviction small-cap ideas at discounted valuations.