Bath/Head Office & Unquoted Equity Team:
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Edinburgh Office & European Quoted Equity Team:
MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – December 2018

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

Whilst we believed the negative sentiment towards UK companies was largely priced into UK stocks a few months ago, the severe sell off over the past month has been accentuated by trade wars and a slowdown in global earnings expectations, leaving fewer and fewer marginal buyers of UK small and mid caps. At the same time, we have seen the traditional round of earnings warnings from December year-end companies and what appears to be an increasing reluctance on the part of investors to buy indebted companies, although there appears to be no change in lending patterns from the banks. Sentiment has penalised bad news severely and failed to reward good news and with political confusion at its height, it appeared an easy call to bet against UK exposure.

We have suffered as a UK small and mid cap from this ‘top down’ anti-UK sentiment and from several ‘bottom up’ company issues. Specifically, there were profit warnings from McColl’s and Low & Bonar. Interestingly the feedback from the companies that we invest in has, in aggregate, remained ‘cautiously optimistic’ and whilst all have thought about the ramifications of all Brexit scenarios in some detail, the consensus is that whatever happens there will be some degree of additional short-term administration or inventory cost. Obviously, no one is currently in a position to make any longer term assessment.

Our reaction to the recent drawdown is the same as it has been in previous periods like this in that we look to improve the underlying quality of the earnings in the portfolio and rebuild capital. To this end we have just invested in Senior, Elementis and Convatec, the latter two being stocks that we also hold in our Growth fund. The ability to buy ‘growth’ companies in our income fund at times like this is one that has proved to add relative value over the long term.