Bath/Head Office & Unquoted Equity Team:
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MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – August 2017

UK small and mid caps continue to be caught between the generally good ‘bottom up’ news that we have seen throughout the recent results season and a rather confused ‘top down’ message that appears to have got slightly worse recently. We expect this uncertainty will continue to persist for the duration of the Brexit negotiations so the message coming back from UK plc will adopt even more importance than usual. We have said before that we believe the ‘easy’ money has been made on the currency trade in the aftermath of the Brexit vote and this remains the case. However the recent strength of both the US and particularly the Euro Zone economies compared to disappointing macro news at home has accentuated the difference in valuations between overseas earners and domestic earners. Whilst the positive share price momentum continues for the former, we are starting to see compelling medium term valuations in stocks exposed to the UK consumer. The number of stocks falling into our investible universe with a prospective dividend yield of at least four percent is growing almost daily. Interestingly a lot of the bearish commentary on the UK consumer is predicated on rising inflation where arguably we may already be past the worst point in the cycle. Against a background of strong employment numbers, a better balance between wage growth and inflation should prove to be a catalyst for a short term rerating of consumer cyclicals.

We inevitably have a relatively high exposure to domestic earners and have added to Saga, BCA and RM Group in the last month. We have also topped up our overseas earners where we believe there is value and have added to holdings in Morgan Advanced Materials, IMI and Tyman. In terms of performance, Hostelworld and Computacenter contributed strongly after announcing good results, with the latter announcing a return of cash which was well received. McColl’s benefited from announcing a wholesale agreement with Morrisons, which surprised most analysts, and Strix, an IPO, performed well and we added to our original holding. On the downside, Epwin fell after issues with a couple of their large clients and the price of Connect continued to drift. With little corporate newsflow in the short term, the largely bearish macro sentiment may lead to downward pressure on share prices but as cashflow remains the most tangible measure of corporate health, the recent strength of dividend growth gives us comfort with respect to the underlying valuations of our portfolio.