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

The pleasing aspect of the relatively strong performance last month was that it came from a wide range of sectors and stocks. In the face of consistently negative commentary on Brexit, the ‘bottom up’ news remains, we believe, supportive of current small and mid cap valuations as activity levels appear to have picked up and management teams have rightly remained outwardly cautious. Domestic business surveys have rebounded from their immediate post election ‘blues’ helped by anticipated improvements in manufacturing and investment and levels of employment remain at historical highs. The bulk of analysts’ caution remains focused on the UK consumer and the effect of falling real wages, but this has been the case for some time and arguably is already priced into a lot of retail valuations. Given the degree of macro uncertainty, we shall continue to hold a balanced portfolio and will look to increase the underlying yield of the portfolio in periods of market weakness.

Highlighting the short term momentum that earnings upgrades can inspire, three of the top contributors to our performance in the last month all stated that trading was ahead of current market expectations. These were Games Workshop, Fenner and FDM which have no correlation to each other from a business perspective. What is consistent, however, is that management have been successful in keeping a lid on expectations and have ultimately ‘under promised’ and ‘over delivered’. With sixteen stocks showing double digit returns over the month, we feel that across the portfolio current earnings forecasts remain relatively cautious and have room to absorb more indifferent news on the macro front. Cape performed well after it was subject to a recommended cash offer. On the downside both Epwin and Eurocell fell in reaction to a competitor being downgraded, but the latter has since released a reassuring set of results. On the trading front we top sliced some of the recent strong performers including N. Brown and Electrocomponents and topped up a number of holdings including Marston’s, Close Brothers, DFS, Northgate and Centaur Media after it announced the sale of its B2C business and a simultaneous acquisition in the digital B2B space. Finally we agreed to invest in Strix at IPO, the global leader in the manufacture of kettle controls.