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

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

The good news since the turn of the year is that the UK equity market has started to recover despite the outcome of Brexit still being unclear, although the balance of probability is now for a ‘softer’ outcome. The domestic economy has remained resilient as real wages rise and household spending holds up well, but it is fair to note that company investment has been adversely impacted by the prolonged political uncertainty. More importantly for us, corporate earnings have remained robust throughout the busy first quarter reporting season and this has helped to focus investors’ attention on the value inherent in some UK centric equities. Global asset allocators, however, still appear to continue to lack enthusiasm for our market and we believe that we need a combination of ‘top down’ calm and ‘bottom up’ earnings growth for a more sustained rally in share prices.

Interestingly, two of our top contributors in the first quarter were Dairy Crest and Manx Telecom, which were both the subject of agreed cash offers suggesting that corporate activity may be about to pick up. Other top performers included DFS, Bellway, Greene King and Go Ahead which are all predominantly domestic earners and RPS, Ultra Electronics, XP Power and Devro which are all substantial overseas earners. The one common theme, as they are all very different businesses, is that they were hugely oversold ahead of reassuring figures, a recurring small and mid cap problem in ‘risk off’ markets. On the downside, the fund suffered from a profit warning from Redde as a major client failed to renew and, latterly, a warning from Saga. Other fallers included Restaurant Group and Kier, which continued to fall after recent fund raisings, and BCA and XPS Pensions.

Overall in Q1 2019, small caps have underperformed both mid caps and FTSE 100 companies. Within our universe we have continued to add to both domestic and overseas earners as we see value in both at current levels. We have also continued to build up our holdings in the ‘growth’ stocks that we were able to purchase on 4% yields at the end of last year and reduced some of our lower yielders as, with an historic dividend yield on the fund of around five percent, we focus in the shorter term on rebuilding capital in the fund that we lost at the end of last year.