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MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – May 2017

Interestingly, the rather muted market reaction to the wholly unexpected election result underlined a rather weary ‘we have been here before’ feeling amongst investors and was helped by the realisation that a ‘soft Brexit’, whatever that may entail, was now the more likely outcome of the discussions with our European partners. A coalition government requiring compromise from the larger party and an environment of sustained macro uncertainty really are nothing new and recent history and the latest company results season suggest that ‘corporate UK’ has the resilience to continue to move forward. We expect business leaders and commentators to publicly voice concern about this uncertainty but as long as the economy continues to grow, and the signs globally are supportive of this, we expect that the companies we invest in will continue to move in the right direction from a dividend and profit perspective. The one variable that is harder to call is the rating afforded to those dividends and profits but on the face of it there appears little reason for this to change substantially. Balance sheets are strong by historic standards and a focus on cash flow accompanied by reluctance to gear up and make marginal acquisitions for ‘growth’ suggest a healthy dose of corporate caution. A sustained downturn in domestic activity is the one macro factor that would cause us some concern but it is not obvious that the election result makes this more or less likely.

After a strong April, the fund essentially trod water in May as there was little corporate news to capture the attention of investors who were growing increasingly nervous about the election as opinion polls started to suggest a closer outcome than had been anticipated. N Brown, Hostelworld and Moss Bros all performed well and two of our top contributors in the month, Intermediate Capital Group and Electrocomponents, released good figures. Galliford Try performed poorly after announcing problems with some legacy contracts in their construction division. On the trading front, we reduced our exposure to housebuilders by top slicing Bovis and Crest Nicholson and sold Interserve in its entirety due to dividend concerns. We added to a number of holdings including Bloomsbury, Hogg Robinson and Marstons and we made a new investment in BCA Marketplace. One constant in our commentaries in the years since the financial crisis has been that, despite the many and varied short term concerns about ever changing ‘top down’ influences, from the banking system to the Greek crisis to Chinese growth to many varied elections and referendums, ‘bottom up’ the companies that we invest in have just ‘got on with it’. We see no reason for this to change.