The UK equity market recovered lost ground in the last month as investor risk appetite returned. At home this was driven in the first instance by weaker sterling as the US dollar recovered and by continued corporate activity. As a relatively UK-centric income fund, we were at a small disadvantage compared to the income sector as a whole but we welcome the shift in sentiment. We are also structurally underweight the oil sector which was a headwind in a month when the oil price recovered strongly. After the recent bounce we are back to where we were at the end of the third quarter last year when the majority of potential investments that fulfil our initial yield criteria are from a small number of domestic sectors. We are currently adopting a “one in, one out” policy in the retail sector, for example, as we want to retain a balanced portfolio. We fully expect our investable universe to increase significantly over the next few months, however, as the inevitable pre summer pick up in fund raisings leads to a short term ‘price drift’ across some UK small and mid cap stocks.
Interestingly, there appears to be an increasing number of commentators debating whether or not UK centric domestic stocks are ‘cheap’ given that it looks as though real wages may finally be starting to increase. We believe that we need to see this translate into improving consumer confidence before it can be reflected in share price rises. In the last month, we have added to a broad range of our existing holdings. We increased our exposure to the oil and gas sector with purchases of SOCO and Wood Group, whose shares have started to recover strongly from recent lows. We topped up a number of stocks with strong overseas earnings including Low and Bonar, RPS, SThree and Strix and at the same time added to UK earnings through Headlam, DFS and Costain. As we have an inherent bias towards domestic earners we have been careful to try to retain an appropriate balance between domestic and overseas earnings within the parameters of our investment process. We also took up our rights in Galliford Try.