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Chelverton UK Dividend Trust plc - Monthly Manager Commentary - May 2020

The trough for recent trading for those companies still ‘open for business’ was last month and May has seen a gradual improvement across the board as lockdown restrictions have been relaxed. Corporate guidance is largely still removed but company statements do generally appear to be better than the most gloomy forecasts initiated at the height of the uncertainty as lockdown began. On a relative basis, the domestic economy appears to be slightly behind the curve with respect to recovery, however, as other countries have relaxed restrictions earlier. The importance of ‘consumption’ to our economy has led to debate amongst commentators about the sustainability of recovery as fears have increased as to the magnitude of the anticipated rise in unemployment as furlough schemes end. Whilst personal savings appear to have risen through lockdown it remains to be seen whether or not consumer confidence is sufficient to kick start the housing and retail markets, particularly with respect to big ticket items. The ‘bottom up’ feedback is to expect companies to tread relatively carefully with respect to restarting their businesses and only gradually increase ‘capacity’ and thereby cost bases as they get tangible evidence of demand improvement. Hence the widespread debate about the shape of the bounce back in economic activity.

At the stock level, the deferral or cancellation of dividends has continued across all market cap bands of the UK equity market. With most domestic companies having December year ends, the annual dividend decision for most Boards occurred in March, the time of most uncertainty with respect to the effects of the virus. Looked at alongside the ability to accept government support, it is unsurprising that a wide range of our investments have felt the need to suspend short term dividend payments. We continue to add to existing holdings within the portfolio where we feel the short term uncertainty is resulting in shares prices which do not reflect the medium term potential of the company to generate attractive cash flows and pay growing dividends. Once again, in a volatile market, there were no real discernible trends to our best and worst performers, although our consumer facing stocks (including Revolution Bars, Marstons, Shoe Zone and Vertu) generally fared better while Constructions and Consultancy stocks such as RPS and Galliford try struggled during the month. With little ‘hard’ corporate news we expect increased share price volatility to continue for the foreseeable future as sentiment fluctuates between ‘risk on’ and ‘risk off’ on short term Covid related news stories.