The last month saw a continuation of the recovery from the ‘knee jerk’ reaction in UK small and mid caps after the result of the referendum was announced. The domestic PMI manufacturing numbers showed an impressive improvement, retail sales were strong and economic and sentiment indicators were surprisingly positive. This all serves to underpin our conviction that the ‘drawdown’ in our fund at the end of June was a response to the overly dramatic scare stories purveyed by a wide range of commentators ahead of the vote. The reality since then has been that the vast majority of corporate results have been at least ‘in line’, although earnings upgrades for domestic earners have admittedly been few and far between compared to the overseas earners benefitting from the strong currency tailwind. In nearly a decade now of running this fund one thing we have always relied on to gauge the ‘mood’ of the stocks that we invest in is the aggregate level of dividend growth within the portfolio. To our mind the ability to pay a relatively high and growing dividend, particularly in times of uncertainty is tangible evidence of the financial ‘health’ of a company and we would argue tends not to be fully reflected in share prices. The good news is that in the last couple of months the rate of dividend growth, albeit predominantly interims, has exceeded our expectations suggesting that despite Brexit corporate UK remains in a pretty good ‘mood’.
At the stock level we have added two new holdings to the fund in the last month. Lavendon is the European and Middle Eastern leader for powered access rental and Essentra which is a supplier of specialist plastic, fibre and foam products with a strong overseas manufacturing footprint. As always with new holdings both yield over four percent. Unsurprisingly a number of stocks continued to recover from the recent sell off such as Morgan Sindall and Polypipe in the building sector and N.Brown and DFS in the retail sector. Importantly we believe that the forecast risks for domestic earners is now more than priced into current valuations as we believe that a combination of a fiscal stimulus package and overly pessimistic consensus forecasts will lead to a gradual upgrading of domestic GDP prospects as we move through next year. Another holding Hostelworld also performed well after a reassuring set of results. We continued to gently add to a number our housebuilders and retailers and reduced RWS and sold Pennon after periods of strong relative performance.