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

As the headlines continue to be dominated by fears of a slowing economy and the uncertainty surrounding the Brexit negotiations, the reassuring news is that the companies that we invest in generally continue to meet, or beat, expectations. After the busy results season it appears that earnings upgrades continue to marginally outnumber downgrades and sensibly, ‘top down’ caution prevents analysts getting too bullish. Despite the subdued macro environment, the good news for UK small and mid caps is that investor sentiment remains broadly positive. From a valuation perspective we believe that current profit and cash flow estimates are supportive of share prices. Our investment process requires a prospective dividend yield of at least four per cent before purchasing a new stock and at the moment the domestic cyclicals continue to provide a disproportionate number of these opportunities. Although this is arguably where the ‘value’ lies within our universe, with little sign of a catalyst to start to realise this value, we will continue to maintain a balanced approach to portfolio construction.

There were no discernible trends or themes behind the performance last month and whilst UK consumer spending has supposedly been under pressure, related stocks such as DFS, Restaurant Group and Greene King did perform poorly. However at the same time N.Brown, Debenhams and Halfords performed positively. Top contributors to performance were BCA, Games Workshop, Morgan Sindall and IMI. We added one new stock to the portfolio, STV, the Scottish broadcaster and digital media company and topped up positions in Crest Nicholson, Close Bros, Pennon, Marston’s and Tatton Asset Management, amongst others. We raised cash by taking some profit in Watkin Jones, Low & Bonar and FDM after periods of strong performance. The IPO market looks set for an active final quarter and we expect this to be a useful source of potential new investments. Crucially, however, the most significant factor in broadening our investment universe remains the better than expected dividend growth amongst UK small and mid caps.