IFSL RC Brown UK Primary Opportunities | Fund Update | December 2022

December: the Santa Christmas Whimper

The Santa rally failed to materialise as equity markets fell in December. The US Federal Reserve and the Bank of England both again raised interest rates. Optimists believe we are nearing the end of the rate raising cycle, others believe there are more rises to come and rates may need to stay higher for longer in order to combat inflation. What we do know is during the course of 2023, the interest rate and inflation picture ought to become markedly clearer.

It has certainly been a chastening year for equity market investors, particularly for those with exposure to small and mid-caps which materially underperformed the FTSE 100. With less exposure to the UK economy and consumer, and significant exposure to oil & gas and the mining sector, the FTSE 100 ended the year as the best performing developed market index.

Equity fund raisings have been considerably lower than levels seen in previous years. 2020 & 2021 were both particularly active years as many companies sought to shore up their balance sheets in 2020 as a result of the pandemic induced uncertainty and 2021 saw many companies raising money to take advantage of the re-opening rebound and increase in investor confidence. Whilst we certainly expected 2022 to be quieter than the previous two years, it was much quieter than we had anticipated as Russia’s invasion of Ukraine resulted in soaring energy prices that put paid to much of the economic growth that we had anticipated. Instead inflation and interest rates rose sharply and a UK recession appears inevitable.

At the end of a year and the start of a new one, it is always useful to look back on what went right and wrong in the portfolio. Unfortunately this year, there was plenty that went wrong. Growth company valuations, which were a mainstay of the portfolio at the start of the year, suffered badly as hopes of further economic growth proved false as Russia’s invasion of Ukraine altered the economic and political landscape. A number of the exciting growth companies that we had purchased over the past two years were unable to meet the growth expectations anticipated by the market. When this happens, share price falls are particularly sharp. The likes of Supreme, CMO Group, Devolver Digital, Likewise, Revolution Beauty, Essensys and Made Tech all disappointed and were subsequently sold. Other growth companies such as Marlowe, Elixirr International, Kape Technologies and Big Technologies continue to trade well and meet expectations but a bear market is relentless and these companies were still marked down. In the fullness of time, we anticipate a positive re-rating of such stocks.

In terms of what went right – we have always said we like to have a well-balanced portfolio across different sectors and market capitalisations and whilst mid and small caps had a dismal year, the FTSE 100 as a whole had a commendable year. We had been suspicious for sometime of those investors who had eschewed big oil companies – deeming them to be outmoded companies whilst forgetting that they are part of the solution to an energy transition to a greener future and their oil & gas is greatly required (and valuable) particularly following Russia’s isolation. We were thus rewarded for our patience and long-term holdings in BP & Shell, which both saw 40% gains in the year. Miners (BHP, Rio Tinto & Anglo American) also put in commendable performances whilst continuing to pay substantial dividends. Banks, another sector that is under owned and whose performance has been a underwhelming for a decade, put in a solid performance with HSBC and NatWest (purchased in 2022) leading the way. Barclays and Lloyds fell modestly but we continue to view the sector as attractively valued and offering a growing dividend yield. AstraZeneca continues to develop and grow its drug pipeline as the shares enjoyed a strong year whilst Unilever, with its global portfolio of consumer brands, eked out useful gains. Whilst these FTSE 100 stalwarts may not be considered the most exciting companies in our portfolio, they have provided a haven in a stormy port and continue to offer modest valuations and attractive dividend streams.

And so to 2023. Whilst there is plenty to be gloomy about – no end in sight to Russia’s invasion of Ukraine, a recession looming, interest rates set to rise further, high inflation that may prove to be more persistent than first thought – these are nevertheless known knowns that the market is digesting. Hence, assuming the economic outlook does not deteriorate significantly more than expectations, then we believe the market will see a pathway through with the expectation that inflation has peaked and will continue to fall and interest rates are peaking and may see cuts later in the year. The more highly valued growth companies have suffered in 2022 and we anticipate 2023 will again favour more lowly valued companies and dividends will contribute a significant portion of total returns. To this end we have increased the dividend yield on the fund (pre fund costs) from 1.8% at the start of the year to 3.5% today. The UK remains cheap by historical levels and offers the highest dividend yield in the developed world.

We anticipate equity fund raisings to recover, albeit from a low base in 2022, though not to the frantic levels of 2020 and 2021. As the economic outlook becomes clearer, good quality companies will be emboldened and will see opportunities for expansion. We are also likely to see some companies raise equity in order to bolster their balance sheets during these recessionary times.

In December the IFSL RC Brown UK Primary Opportunities fund returned -1.4% compared with -1.4% for the FTSE All Share and -1.2% for the IA UK All Companies sector.

Purchases

No new companies were added to the portfolio during the month.

Sales

Underperformers Gelion and Springfield Properties were sold. We also trimmed the holding in Hollywood Bowl following a positive trading update.

Cumulative Performance (Total Return %) – December 2022

Fund/Benchmark Name	3M to 31/12/2022	6M to 31/12/2022	Year to 31/12/2022	3 Years to 31/12/2022	5 years to 31/12/2022	Since Inception (28/05/1997)
IFSL RC Brown UK Primary Opportunities P Acc	4.3	-1.7	-16.9	-2.5	7.6	426.72
Quartile Ranking IA UK All Companies	4	4	3	3	3	2
IA UK All Companies	9.7	4.2	-9.1	0.2	8.8	291.0
FTSE All Share	8.9	5.1	0.3	7.1	15.5	327.9

Source: FE: 31/12/2022 Cont. Discrete Annual Performance (Total Return %) – December 2022

Fund/Benchmark Name	Year to 31/12/2022	Year to 31/12/2021	Year to 31/12/2020	Year to 31/12/2019	Year to 31/12/2018
IFSL RC Brown UK Primary Opportunities P Acc	-16.9	20.5	-2.7	18.9	-7.2
Quartile Ranking IA UK All Companies	3	1	1	3	1
IA UK All Companies	-9.1	17.3	-6.0	22.2	-11.2
FTSE All Share	0.3	18.3	-9.8	19.2	-9.5

Source: FE: 31/12/2022

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.