As macro analysis was trying to determine the ‘shape’ of the economic recovery, UK small and mid cap prices bounced in the month from the wide spread over reaction of the previous month, a pattern we have seen before within our investible universe at times of extreme economic shocks. History suggests, however, that markets will remain extremely volatile in the short term. There was no real theme to our better performers in the month, XP Power, GVC, Go Ahead and Crest Nicholson, or our poorer performers, Bakkavor, STV, and Wincanton. Hays and Bloomsbury both sold off after issuing equity, and our feeling is that the recent rush of equity issuance will now abate as investor appetite falls. Financial prudence is the order of the day and has led to an unprecedented cancellation of dividends across all sectors and size bands of the domestic equity market. At the same time, company analysts are ‘kitchen sinking’ earnings estimates with little idea of actual outcomes and the focus for the moment remains firmly on the monthly cash burn of companies. The speed at which companies are able to move away from government support remains crucial to the timing of a recovery.
At the stock level we have recently had updates from a number of our stocks that were better than the market’s worst fears including IMI, Halfords and Ultra Electronics. We have sold our holdings in Polypipe and Costain and invested in Supermarket REIT and Anglo Pacific for a yield pick up. As managers, we believe that the vast majority of our holdings that have recently had to cancel dividends have sufficiently robust business models, are financially sound enough and want to return to paying dividends as soon as they can because they understand the importance of dividends to their shareholder base. The timing of the return to the dividend list will vary greatly depending upon each company’s specific circumstances however, from a portfolio construction perspective, we are actively trying to move our income receivables to the left by targeting stocks that will recover and pay earliest. This obviously cannot be done overnight and is very much a ‘work in progress’ for us, but it is a repeat of the successful process used when we were recovering from the financial crisis a decade or so ago. In our favour is the fact that, in a low interest rate environment and with income in such short supply, company boards know that paying a dividend is a good way to attract the marginal investor onto their shareholder register.