Whilst the gloomy UK macro news continues to provide a minor headwind, there does appear to be some slightly better news on the horizon, notwithstanding the recent headline ‘agreement’ with Europe which has had a very mixed reception. Firstly, the recent strength of Sterling should provide a small boost to the relative attraction of small and mid caps versus their more Global orientated larger counterparts, although thankfully the days of ‘knee-jerk’ reaction to currency moves appear to be over. Secondly, there is a growing feeling amongst commentators that inflation may have peaked. This is potentially significant for domestic consumer cyclicals such as retailers, restaurant groups and pubcos who have recently suffered from rising costs because, if it helps the prospect of real wage growth, it should be a positive for consumer sentiment. We expect increased share price volatility in these last months of the year as December year-end companies fine tune earnings expectations and we have already been reactive to take advantage of a number of very attractive opportunities.
We highlighted last month that a wide range of share prices were drifting downwards, bringing stocks into our prospective four percent dividend yield investible universe and this was the case with Tate and Lyle, a food ingredients business which we added to the portfolio. Alongside Bakkavor, the leading player in the UK prepared foods market which we supported at IPO, this has increased our exposure to ‘defensive growth’ stocks. We bought Ultra Electronics, an international group operating in the defence and aerospace and security and cyber markets, after a profit warning and DMGT, a multinational portfolio of media businesses, after earnings were downgraded for next year. We believe both of these to have very attractive medium term prospects. Finally, we added Babcock, the UK’s leading engineering support services company, to the fund as it fell out of the FTSE 100. For a fund that has historically only added a dozen or so new names to the portfolio in a year this was a very high level of monthly activity for us. However, we are encouraged that as the UK equity market continues to rise, the excessive reaction to disappointing short term news has meant that we are able to purchase stocks of such sound underlying long term quality in an income fund. At the same time we have raised funds from some of our favourite long term holdings where very positive short term share price momentum has driven down dividend yields. These include Computacenter, XP Power, FDM, Electrocomponents, Hill & Smith and TT Electronics. The net result of all of this activity is, we believe, an immediate yield pick up without a fall in medium term earnings quality, with, perhaps, a slight deferral of short term momentum. This is a process that has served us well over the long term.