The last month has seen a sell-off in equity markets as interest rates have started to rise and inflation expectations are for a more sustained increase rather than just a transitory reaction to recovery from the pandemic. As expected, we have seen the first signs of a style shift from growth into value with large cap banks, oil and gas, telco and mining companies being amongst the first to benefit. Whilst our investible universe is relatively underweight these sectors, the style drift to value should ultimately benefit a number of our cash generative ‘dull but worthy’ stocks. Historically in times like this, we look to add a number of good growth stocks to our portfolio as they temporarily fall out of favour and the price move brings the dividend yield to our target level. As the anticipated cost of living increases make headline news in the UK, the savings ratio still remains robust and we will be keeping a keen eye on confidence indicators and consumer spending over the next few quarters.
Two of our best performing stocks in the month were Direct Line and Sabre Insurance which rose as the outlook for motor insurance pricing improved. At the same time, Sabre announced an exclusive underwriting deal to grow their taxi book which comes hard on the heels of a similar deal with respect to motorcycle insurance that was announced towards the end of last year. After good relative performance, we top sliced Bloomsbury on weighting grounds and reduced Elementis on income grounds. Other strong performers included Wilmington after a good trading update and Watkin Jones after a reassuring set of results. Despite widespread negative top-down sentiment, corporate trading remains resilient and a key performance indicator will be the balance between forward looking earnings upgrades and downgrades as we move through the busy results season over the next couple of months. On the downside, our housebuilding holdings came under pressure after the much-publicised move by the government to get the sector to pay for cladding problems. Other poor performers included Polar Capital as investors worried about the short-term valuation of its large tech fund, Redde, FDM and Strix. We continued to raise money from Babcock and added to our positions in Dunelm, i-Energizer and Synthomer.