The Fund had a more difficult month in June, giving up some of its recent outperformance as smaller companies, where the Fund is overweight, underperformed large caps which in relative terms benefitted from a weakening £ on the heightened prospect of a no-deal BREXIT, the prospect of looser monetary policy around the world and more conciliatory noise in the US/ China trade war. The Fund was also impacted by stock specific issues with both XPS Pensions and RPS, the main detractors to the Fund’s performance, issuing profits warnings. Future, the Fund’s largest holding, also fell back sharply after a sustained period of outperformance, on the publication of a critical research report. The company has subsequently issued an upbeat trading update pointing to strong audience growth and upgrading earnings guidance. On the positive tack, Elektron Technology rose strongly on the back of another positive trading update.
During the month we topped up XPS Pensions and RPS after both shares experienced percentage share price falls substantially in excess of their earnings downgrades. We also added to Euromoney and Elementis on the back of share price weakness. We top sliced a number of holdings which have performed strongly and where, in our view, valuations are getting reasonably full, such as Alpha FX, Keystone Law, Porvair and Polypipe. We exited Ashmore, on valuation grounds, and IMI, reducing our Industrials exposure. We also exited Photo-Me International after a sustained period of poor performance.
Whilst Trump is now making more conciliatory noises towards China over trade, it is increasingly clear that the dispute has started to impact global industrial growth with share prices, after some respite in the first half, now coming under increasing pressure. On the domestic front there are signs of increasing inertia as decision making grinds to a halt both at the corporate level, as uncertainty on the timing and implications of BREXIT take hold, and in government, whilst the Conservative leadership is resolved.
Notwithstanding the more difficult June, the Fund has enjoyed an encouraging first half to the year, rebounding from the sell-off in Q4 2018. Going into the second half, the Fund, after stripping out the low valuation caused by the Q4 2018 sell-off, still trades near the bottom end of its forward earnings multiple range since launch, notwithstanding its first half performance. Barring the odd mishap, earnings forecasts of the Fund’s holdings have been generally quite resilient. Finally, a more accommodative monetary policy around the developed economies should be helpful for equities.