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

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

A month on from the election and, despite the Tories and the DUP finally reaching some form of agreement, political uncertainty still persists and Brexit looks like becoming a ‘legislative battleground’. This all serves to undermine business optimism and consumer confidence in the short term and we have tangible evidence of this with the warning from DFS, the sofa retailer, with respect to current trading. A year after the Brexit result, the ‘easy’ money has been made on the currency trades and the earnings upgrades in the overseas earners that were driven by falling sterling and are arguably now largely priced in. The outlook for domestic earners remains more complex as the full effect of imported price inflation on both the economy and corporate margins is yet to be fully quantified. Whilst weak sterling has provided a tailwind to the market as a whole as it has benefited the ‘mega cap’ dollar earners, we now need to see evidence of real turnover growth and productivity gains to drive share prices sustainably higher. In a quiet time for company newsflow, we are going through a period of ‘price drift’ in the market as there is no discernible sector or style leadership and investors remain relatively cautious, although we believe that current profit estimates are undemanding. Our balanced approach to portfolio construction remains appropriate.

The last month was an active one from a trading perspective. We top sliced a number of our holdings that had performed particularly well including Fenner, Electrocomponents and RWS, and which had reached levels of dividend yield at the lower end of our required range. We also reduced Hostelworld and Games Workshop based on their increased weightings in the portfolio. All of these stocks are notable for their relatively high exposure to overseas earnings and we bought holdings in De La Rue and Morgan Advanced Materials and added to Northgate and BCA, in part, to retain exposure to non-sterling earnings. In aggregate, our portfolio companies currently have approximately sixty percent gearing to the domestic economy at the turnover level which is a degree of exposure that we are comfortable with. As a generalisation so far this year the overseas earners have delivered the share price ‘momentum’ and the domestic earners is where we can find best ‘value’. We need a combination of both to deliver sustainable performance and we look for the current domestic ‘value’ plays to deliver capital growth when sterling starts to appreciate again. Elsewhere we replaced Segro with another property company, Palace Capital, achieving a good yield pick up, and we added an IPO, Tatton Asset Management, to the fund.