Bath/Head Office:
London Office & Quoted Equity Team:
Edinburgh Office & European Quoted Equity Team:

Chelverton UK Dividend Trust plc - Monthly Manager Commentary - November 2018

A brief respite followed by an escalation in ‘tariff wars’ have continued to dominate analysts’ thoughts and have undermined global equity markets. Beneath the headlines however, the real issue is that yield curves have been flattening for some months now which is generally taken as tangible evidence by investors that the global economy is slowing, with some commentators now predicting yield curves inverting as an inevitable precursor to a widespread recession. In our own portfolio, we have seen the valuations suffer accordingly, particularly in our domestic earners that are more consumer related, in response to the looming ‘Brexit’ vote and increased fears over a potential change in government. If we add into the mix very low trading volumes which tend to accentuate short term price movements and an increased number of year end trading updates that have understandably introduced a note of caution into outlook statements, then arguably, as a UK small and mid cap fund, we have just encountered our ‘perfect storm’. Importantly however, there currently appears to be a disconnect between a largely resilient corporate sector, albeit consensus earnings are under pressure and the ‘gloom’ reflected in a whole host of recent share price moves.

Like most small and midcap funds, we tend to suffer in the short term when equity risk premiums change as dramatically as they have done recently. We are also obviously vulnerable when individual stocks ‘disappoint’ the market as we were last month as Kier and Restaurant Group announced rights issues and KCOM’s earnings were downgraded substantially after a trading statement. As an income fund however, with an investment process that incorporates dividend yield and corporate cash flows, history has shown that after relatively large drawdowns in periods of uncertainty such as after the Referendum and the last General Election investors are attracted in the first instance to ‘get back to basics’, and there is no more basic attraction than strong cash flows. There was no real discernible theme to our better performers last month, which included UP Global Sourcing, Sanderson and Centaur Media. Whilst it is understandable that markets have sold off as growth rates have been downgraded, we continue to believe that based on corporate cash flows there has been an overreaction with respect to UK centric stocks due to the particular short term political issues in the domestic market.