Bath/Head Office & Unquoted Equity Team:
London Office & Quoted Equity Team:
Edinburgh Office & European Quoted Equity Team:

MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – January 2018

At the time of writing, investors’ attention is on falling stock markets globally. Better than expected economic growth against a background of a rising trend in bond yields has led to expectations of rate rises and a sell-off in equity markets. At home, this has combined with rising sterling to undermine the prices of the large bond proxies but it is still too early to see a marked pick up in cyclicals or value stocks within our small and mid-cap investment universe. The domestic economy continues to benefit from the positive momentum in the manufacturing sector and business sentiment remains resilient, but on the downside the consumer still appears to be cautious. The recent stock market fluctuations have been largely driven by ‘top down’ macro factors and we believe that ‘bottom up’ UK corporate earnings remain resilient and broadly supportive of current valuations. On a positive note for our portfolio, dividend growth looks set to remain strong.

As a small and midcap fund we have an inherently high relative exposure to domestic cyclicals compared to the income sector as a whole, so our attention at the start of the year is partly focussed on trading over the Christmas period. As a generalisation, this year it was disappointing for us and the prices of Debenhams, Moss Bros and N. Brown were amongst our worst performers. Interestingly, however, there is a growing body of opinion that real wages in the domestic economy will start to grow this year which would hopefully provide some much needed respite to the high street. Connect Group performed badly after a profit warning and our largest holding, Games Workshop, gave up some of last month’s gains. On the plus side, Ultra Electronics, Fenner, Ashmore and Tatton Asset Management all contributed strongly to performance. We added to over a dozen holdings including recent purchases Babcock and Sabre, domestic earners Crest Nicholson, Shoe Zone and DFS as well as stocks with good overseas exposure, De La Rue, Tate & Lyle and DMGT. We continue to seek to retain a balanced sector approach within our portfolio construction process through what we believe will be a period of heightened share price volatility in the short term. This should also, however, bring a number of new opportunities into our investible universe as prices fall and dividend yields rise. We trimmed holdings on yield grounds in Fenner and RWS as they performed well, and River and Mercantile as we look to reduce our overweight exposure to the fund management industry.