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

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

The outperformance of small and mid-cap last month was less a result of improved trading or a shift in investor sentiment and more a reflection of the increased pressure on large caps as the trade war fears were set alongside worries over emerging markets as the dollar strengthened. At home, the interest rate rise was already priced in, evidenced by the fact that our housebuilders all returned a small positive contribution. The improved summer weather provided some respite for the UK consumer stocks although it was rather selective as within our own portfolio DFS and N. Brown delivered a positive return and Shoe Zone and Halfords a negative one. On a reassuring note, analyst earnings expectations continue to largely be devoid of hype and hope and appear to be based on a healthy dose of realism. Whilst this may have the effect of dampening short-term optimism, it does engender a more ‘rational’ bottom up investment environment despite the massive top down uncertainties. It will be interesting to see how the raft of new equity issuance is priced as we get closer to Brexit.

In terms of performance, the last month was the proverbial ‘mixed bag’ as our best and worst contributors included a balance of both overseas and domestic earners across a wide number of sectors. On the plus side was Games Workshop after strong final results and TT Electronics, Wood Group and Aggreko after solid interims. Tatton Asset Management also performed well as its growing DFM business was more widely appreciated by investors. On the negative side Chesnara sold off as the price gave up last month’s gain and Essentra, Hostelworld and XP Power were all weak after releasing interim results. As these last three still look to be attractive investments to us, we added to our holdings at an aggregate yield ahead of that of the underlying portfolio. The desire to gradually enhance underlying income as ‘Brexit’ related volatility increases also underpinned our continued sale of Electrocomponents and the reinvestment of the monies received from the takeover of Fidessa into existing holdings such as Centaur, Babcock, McColl’s and Sabre Insurance. We added one new stock to the portfolio, XPS Pensions, the UK specialist pensions business.