Bath/Head Office & Unquoted Equity Team:
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MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – August 2019

MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – August 2019

There was some good news on the domestic front as announcements of increases in public spending and a better than expected July GDP number, led by the services sector, dispelled fears of a UK recession. Brexit continued to dominate the news headlines however and all possible outcomes still appear to be open. This uncertainty continues to influence investor sentiment and short term share prices and as a small and mid cap ‘value’ fund we remain firmly in the eye of the storm, almost slavishly following the daily movements in Sterling up or down. We remain convinced however that almost irrespective of the outcome the companies that we invest in are largely resilient and will be able to adapt to the new threats and opportunities as we finally reach a resolution. A more long term concern would be a protracted Global trade war that undermined economic growth, and some of the more bearish commentators are now starting to build this into forecasts. The good news remains the level of dividend that our investments are consistently able to pay us in a world where it is proving increasingly difficult to find positive real yields.

At the stock level our best performer was Greene King which was the subject of an agreed cash offer and we sold half of our holding. This continues the recent trend of private equity or overseas investors buying undervalued UK small and mid cap assets as prices are depressed by Brexit worries and Sterling is relatively weak. History suggests that if the corporate activity continues, as we believe it will, acquisition valuations will rise as investors have a growing tendency to hold out for higher prices. This bid had the knock on effect of boosting the Marstons share price which was another strong contributor for us in the month. GVC, Ultra Electronics, XP Power and Rank also performed well. On the downside Shoe Zone had an earnings downgrade and the fact that the shares fell by substantially more than the downgrade serves to highlight the volatility of domestic earners at the moment. Other fallers included Wood Group Ashmore and Hostelworld. We raised money from Phoenix, Convatec and BBA and added to positions in Elementis, FDM and Northgate.