Bath/Head Office:
London Office & Quoted Equity Team:
Edinburgh Office & European Quoted Equity Team:
MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – October 2022

MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – October 2022

Towards the end of the month Liz Truss resigned as UK prime minister and was replaced by Rishi Sunak, who immediately sought to instil a sense of calm into volatile financial markets and promptly reversed the majority of the mini budget announced a month earlier. Rather than looking at a series of bumper tax giveaways commentators are now expecting a wide range of tax increases and spending cuts to be announced later this month adding more gloom to the domestic newspaper headlines. Sterling has rebounded from recent low’s and we have recently had two macro indicators in the US, housing starts and the latest CPI number, that suggest the Fed may not have to raise US rates as far or for as long as previously expected, although the rhetoric from the Fed remains cautious. We view an end to US rate rises as a lead indicator to equities becoming generally more attractive to investors. The cash flow yields available within our investible universe should make us particularly attractive as equity risk premiums fall but we are not at this point yet as there is just too much short-term economic uncertainty. As managers we are aware however that share prices have a tendency to react some months ahead of tangible evidence showing that the worst is over.

At the stock level we still have a wide range of companies reporting good results for the current year with strong forward order books, despite some sharp share price falls. A number of industrials have noted that, unusually, as economic activity has slowed order books have held up because there has been a lack of stock in the system due to previously highlighted shortages. Essentially analysts have downgraded in expectation of a slowdown that hasn’t quite happened yet but has been pushed forward into next year. In some sectors such as retail and leisure earnings are falling now however as consumer confidence has fallen in the face of rising food, mortgage and energy costs, and the issue here is whether or not the falls have further to go or are we now bumping along the bottom in terms of earnings expectations. There were no real themes to our best or worst contributors over the month as Telecom Plus, Bloomsbury and Redde added value and XPS Secure Trust and Drax detracted from performance. We added a position in Marshalls to the fund after a sell off brought the shares back into our dividend yield range of at least 4%. It is a hard landscaping and building materials supplier which earlier this year bought Marley and is evidence of us actively managing the portfolio to improve the quality and growth prospects of our underlying dividends.