Fed tightening and trade tariffs have finally convinced investors of a meaningful pick up in corporate earnings risk on the downside and this has been reflected in a high profile sell off of highly rated growth stocks. We have for some time now been selling a number of our most highly rated investments but as is usually the case when there is a sharp macro inspired correction, all small and mid caps suffer as equity risk premiums rise. At the domestic level this has been exacerbated in the last month as the resource sectors proved to be resilient, providing a relative benefit to large cap indices. We have a tried and tested response to rapid drawdowns and once again we raised cash at the margin from stocks that held up well and reinvested in companies that were inevitably oversold. Our investment process requires a four percent dividend yield before we can add a stock to the portfolio and the sell off has noticeably increased our investment universe. We added Hill & Smith and BBA Aviation to the portfolio after share price weakness, both of which we have held before in the fund. The net result of market moves and portfolio activity is that the aggregate yield of the holdings in the portfolio is now almost back to where it was six years ago, at around five percent.
In a poor month, our top contributors were all domestic plays, although from a disparate collection of sectors, Polypipe, Dairy Crest, Pennon, Shoezone and Watkin Jones, the last two of which both had positive trading updates. Interestingly, Shoezone have indicated that they will pay a special dividend with their final payment, something that has largely disappeared from our income account this year. On the downside, RPS issued a profit warning, Restaurant Group responded poorly to the announcement of a potential acquisition and rights issue, and the ‘bears’ got the upper hand at Babcock and Inchcape. Whilst we have believed for some time that the UK-centric stocks in our fund have largely already been de-rated, where stocks have sold off recently the continued gloom over ‘Brexit’ has led to an inevitable short term buyer’s strike, although a shift in sentiment from ‘growth’ to ‘value’ should benefit us. Whilst domestic macro indicators remain volatile, the budget was both unexpected in its willingness to spend the recent fiscal windfall and broadly welcomed.