IFSL RC Brown UK Primary Opportunities | Fund Update | August 2021

August: Dividend recovery

The recent UK dividend monitor report from Link group highlighted the sharp recovery in UK dividends in Q2 2021, rising 43.8% from the previous year on an underlying basis. Of course much of the recovery came as a result of companies resuming dividends. In Q2 2020, three-quarters of companies cut or cancelled their dividend as result of uncertainty caused by the pandemic. Many companies have fared well during the pandemic and continued to pay and/or increase their pay-outs. This provides us as investors confidence that they are able to withstand even the most difficult of economic environments as was witnessed in 2020. Other companies that were more affected, understandably chose to conserve cash, and with a sharp economic recovery unfolding, are now able to resume shareholder payments. Dividend payments are still below Q2 2019, prior to the pandemic, but there are grounds for optimism as further economic growth is expected. The banking sector, which was forced by the government to stop dividend pay-outs last year, has been able to resume dividends and with their high capital levels, should raise pay-outs further.

We are not an income fund and therefore do not seek a certain level of income. Nevertheless, we favour companies that make profits and have the ability to pay a dividend. Some companies prefer to retain their profits to fuel further growth. This to us is a perfectly rational use of cash. We focus on the total return – share price appreciation and dividend income – of our investments. Some of our most exciting investments will deliver little or no income, but instead deliver shareholders significant capital growth.

Our conversations with our contacts at investment banks suggest a busy autumn and winter for IPO’s and equity raises. There is a substantial pipeline of companies wanting to come to the market and existing listed companies wanting to raise equity for growth purposes. As ever, it is our job to invest in those we believe will produce strong, stable returns for our investors, whilst maintaining a well-balanced portfolio across different sectors and market capitalisations.

It was as anticipated, a quiet period for equity raisings given holiday season. Nevertheless, we re-initiated a holding in Dr Martens as a result of a secondary sell down and also added McColl’s Retail Group to the portfolio.

The UK market made further progress with the mid cap FTSE 250 hitting new highs. The worrying scenes in Afghanistan are, for now, not having a major impact economies and markets. Comments from the US’s Federal Reserve are also being closely watched for an indication of a tapering of its bond purchase program and an interest rate rise.

In August the IFSL RC Brown UK Primary Opportunities Fund returned 2.63% compared with 2.67% for the FTSE All Share and 3.23% for the IA UK All Companies sector. Our lower exposure to mid-caps relative to many of our peers was unhelpful with the FTSE 250 materially outperforming large and small caps.

Purchases

Dr Martens

We first took a small holding in this famous footwear company at IPO in January. Following a strong initial performance, shares back tracked following a solid, if uninspiring set of results, resulting in share price weakness. We re-purchased a holding at a 5% discount to what we felt was an already depressed price following the sell off. The company is growing strongly and sees the opportunity to expand its presence in markets such as Germany, North America and China. Increasingly they are able to sell their products direct to consumers through their retail stores and online, driving profitability. It is a constituent of the FTSE 250 with a market cap in excess of £4bn.

McColl’s Retail Group

McColl’s has over 1200 convenience stores and newsagents across the UK. The shares were acquired, at a 30% discount to the previous night’s closing price, as part of a £30m equity raise to accelerate the roll out of the Morrisons daily stores, which offer a greater range of fresh produce. Management believes that over 700 of the existing stores are suitable for the rebranding. We view this an attractive turn around story with a lower debt profile post the raise and see considerable benefits to the Morrison brand and proposition.

Sales

Modest levels of cash were raised to provide capital for the new investment opportunities we anticipate in the coming months. Profits were taken on our small holdings in Fonix Mobile, ASOS and Arena Events. Naturally we monitor all holdings and are not afraid to release liquidity where we consider there to be more attractive primary opportunities.

Cumulative Performance (Total Return %) – July 2021

Fund/Benchmark Name	3M to 31/08/2021	6M to 31/08/2021	Year to 31/08/2021	3 Years to 31/08/2021	5 years to 31/08/2021	Since Inception (28/05/1997)
IFSL RC Brown UK Primary Opportunities P Acc	2.4	11.6	34.6	21.9	61.1	519.4
Quartile Ranking IA UK All Companies	3	4	2	2	1	1
IA UK All Companies	4.4	14.6	32.4	17.0	41.8	328.7
FTSE All Share	3.4	13.3	27.0	11.4	33.3	313.2

Source: FE: 31/08/2021

Cont.

Discrete Annual Performance (Total Return %) – July 2021

Fund/Benchmark Name	Year to 31/08/2021	Year to 31/08/2020	Year to 31/08/2019	Year to 31/08/2018	Year to 31/08/2017
IFSL RC Brown UK Primary Opportunities P Acc	34.6	-6.2	-3.5	7.1	23.5
Quartile Ranking IA UK All Companies	2	2	3	2	1
IA UK All Companies	32.4	-8.8	-3.2	6.5	13.8
FTSE All Share	27.0	-12.7	0.4	4.7	14.3

Source: FE: 31/08/2021

Please be advised that 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.