Sterling strength acts as a brake on FTSE gains
In January, IFSL RC Brown UK Primary Opportunities (+0.55%) outperformed the UK equity market (-1.93%). The Fund has performed strongly over the past 12 months returning 18.13% compared with 12.45% for the FTSE All Share and the Fund ranked in the top quartile in its sector. (IA UK All Companies)
With markets starting the year at record levels and global growth accelerating, we anticipate a busy year for Primary Opportunities as companies look to issue equity for expansion. We participated in placings in Blue Prism, Dechra Pharmaceuticals and Entertainment One. There were also secondary selldowns in OneSavings Bank, Clipper Logistics and Just Group. We also added Diageo to the portfolio, taking advantage of dollar weakness.
January saw the UK underperform other developed markets as sterling strength proved a headwind to the overseas earnings nature of the FTSE. The month began with markets in buoyant mood as new heights were scaled. However, the Trump administration’s eagerness to talk down the dollar and rising bond yields in anticipation of higher interest rates and inflation, resulted in a modest market sell off.
We are mindful of the strong rise in equity markets in recent years and continue to favour companies with growth characteristics trading at realistic levels. We see some areas of excess in the market but similarly areas of value notably amongst UK domestics. These are good market conditions for active fund managers. The UK equity market has the highest dividend yield of any major developed market which we anticipate would result in outperformance in the event of a sharp global sell off.
Purchases
Just Group
Just was formed in 2016 by the merger of Just Retirement and Partnership Assurance. It is a market leader in non standard retirement benefit solutions. The shares were purchased as part of a sell down by private equity at a 6% discount. We consider the shares modestly valued with growth prospects and trading at a discount to enterprise value.
One Savings Bank
A fast growing UK challenger bank that we have previously invested in. We acquired the shares at a 6% discount as part of a placing by private equity firm JC Flowers. With them only now holding around 10% of the Company, the stock overhang that has been depressing the share price is close to an end.
Clipper Logistics
A Company we have admired for a considerable time. Clipper is a market leader in providing logistics solutions to retailers such as Asos and John Lewis. It is best known for handling the return of online items, an area that has seen huge growth over the past decade and is anticipated to grow further. The shares were purchased at a 7% discount as a result of a selldown by the founder.
Blue Prism
Blue Prism is considered to be one of the most exciting tech growth companies in the UK. It provides robotic process automation for lower level IT work allowing employees to focus on higher value work. It has a growing list of blue chip clients. The shares were acquired as part of placing to fund further growth.
Dechra Pharmaceuticals
We added to our existing holding in this supplier of veterinary pharmaceutical products as part of a placing to raise £105m for acquisitions in Holland that are materially earnings enhancing.
Entertainment One
Entertainment One is a producer and distributor of film and video content. We acquired the shares as part of a placing to fund the acquisition of the part of a subsidiary they did not fully own.
Diageo
We took advantage of recent share price weakness, largely due to dollar weakness, to purchase one of the largest FTSE companies, a maker and distributor of some of the best known alcohol brands in the world. Since the takeover of SABMiller in 2016 which had been an excellent performer for the Fund, we have wanted to replace its defensive characteristics, and the recent pullback in Diageo allowed us to buy in.
Sales
Keyword Studios
A relatively modest holding but with one of the highest valuations in our portfolio. Following the recent IPO of Sumo Digital we were keen to reduce our exposure elsewhere to the video games industry.
Hostelworld
Having performed strongly in 2017 and an excellent long term investment, we took profits given the lack of visibility the Company has over bookings. We required the cash for forthcoming investment opportunities.
Empiric Student Property
ESP has performed poorly with new management raising concerns about the efficient running of the business. Whilst the 6% dividend yield is highly attractive, we have concerns that it may take longer for it to be covered than market expectations.
Joules
We took advantage of a share price rise following a good Christmas trading update to reduce our holding. The shares have more than doubled since IPO in 2016 and this is the first time we have reduced our holding.
London Stock Exchange
A long term strong performer – we took the opportunity of a price rise as a result of bid speculation to reduce our holding and raise cash for imminent investment opportunities.
IQE
The shares have been extremely volatile since purchase and with concerns over disappointing sales of Apple’s new Iphone X and a growing short position being taken by hedge funds, we took the opportunity of some bear closing to cut our losses.
Countryside
A modest holding following previous sales. We completed our selldown as cash was required for more attractive investment opportunities.
BAE Systems
A strong long term defensive performer though recent performance has proved disappointing. We have concerns over the Company’s order book which is heavily reliant on orders from Saudi Arabia and its pension deficit.
Midwich
We reduced one of our largest active holdings following a trading update, taking some profits following a more than 20% rise in share price in the month.
Cumulative Performance (Total Return %)– January 2018
| Fund/Benchmark Name | Year to 31/01/2018 | 3 Years to 31/01/2018 | 5 years to 31/01/2018 |
|---|---|---|---|
| IFSL RC Brown UK Primary Opportunities P Acc | 18.13 | 44.51 | 65.13 |
| IA UK All Companies | 12.45 | 27.88 | 57.53 |
| FTSE All Share | 11.28 | 27.41 | 50.25 |
Discrete Annual Performance (Total Return %) – December 2017
| Fund/Benchmark Name | 31/01/2013 to 31/01/2014 | 31/01/2014 to 31/01/2015 | 31/01/2015 to 31/01/2016 | 31/01/2016 to 31/01/2017 | 31/01/2017 to 31/01/2018 |
|---|---|---|---|---|---|
| IFSL RC Brown UK Primary Opportunities P Acc | 10.79 | 3.14 | 2.14 | 19.78 | 18.13 |
| IA UK All Companies | 16.28 | 5.94 | -3.30 | 17.60 | 12.45 |
| FTSE All Share | 10.10 | 7.11 | -4.63 | 20.06 | 11.28 |
Source: FE 2018
The past is not necessarily a guide to future performance. Investments and the income derived from them can fall as well as rise and the investor may not get back the amount originally invested.
