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

The year finished on a positive note as a shift in sentiment towards resource stocks and cyclicals and away from the bond proxies was evident. Positive noises about US corporate tax rates helped to fuel an increasingly bullish outlook for Global growth for 2018 and although the domestic economy is forecast to be slow by international standards, growth is still expected to be ‘reasonable’ by historic standards. One ‘theme’ that is of particular interest to us is the potential for a rise in real wage growth as we move through the year, which we believe is a strong possibility. Given the apparently cheap rating of the domestic consumer cyclicals and our exposure to them as a UK small and mid cap fund this could prove to be an area of strong relative performance for the fund if it proves to be a catalyst for multiple expansion. We will not, however, be significantly increasing our exposure in the short term as the history of the fund has shown that a balanced portfolio in terms of sector and style bias serves us best over the medium and long term. One feature of the past year’s performance was the contribution from companies who delivered strong performance from ‘self-help’ i.e. just getting on with doing what is best for the business and stakeholders. With top down political issues causing a policy vacuum in a number of leading economies, perhaps a greater bottom up focus on the corporate sector will prove to be the way forward for an increasing number of investors.

Games Workshop, our largest holding, performed strongly in the month as it made another dividend announcement and now appears to be firing on all cylinders with respect to manufacturing, distribution and both on-line and bricks and mortar retail sales. Intermediate Capital and Hostelworld made solid contributions to performance, as did RM which is ahead of plan with respect to the integration of the recently acquired Connect education business and announced that overall figures would be ahead of expectations. On the downside, there were warnings from Low & Bonar and Saga, and we have been topping up our holding in the latter as the price has fallen. Elsewhere we added to Babcock, Close Bros, Gattaca, Northgate and Essentra, amongst others, and sold Hill & Smith and Lancashire on yield grounds. We also sold DS Smith as they were promoted to the FTSE100. As we enter the New Year investors’ appetite for equities seems set to continue, in the short term at least, and underlying corporate earnings appear robust and supportive of current valuations.