IFSL RC Brown UK Primary Opportunities | Fund Update | July 2022
July: UK market bounces from June lows
Markets regained some poise following sharp falls the previous month. The outlook remains a difficult one with inflation still rising and central banks forecast to raise interest rates further in order to combat it. The risk of recession remains real, albeit current expectations are not for a deep recession – which provides us with some hope that equity valuations are bottoming. There appears to be a two way pull between those who expect inflation to ease in 2023 to more normal levels and those who believe the current inflation we are experiencing will be more persistent. Clearly the latter is more harmful to equity markets. It is our view that the former is still more likely as we believe the current high energy prices will not worsen materially and may even soften, especially with economic growth softening.
A recent survey by Bank of America shows investment managers’ equity weightings at their lowest levels since the Great Financial Crisis of 2008-10 and cash holdings at 21 year highs. Given moderate equity valuations, particularly in the UK, the contrarian in us, believes this to be a buying opportunity for long term investors.
As ever, we continue to have a well-diversified portfolio of 60-80 stocks across different sectors and market capitalisations. This month we added Digital 9 Infrastructure and HICL Infrastructure to the portfolio whilst also adding to the holding in Dechra Pharmaceuticals. All raised new equity. We also added Aviva to the portfolio, taking advantage of recent market weakness. The forecast dividend yield of the fund now stands at 3.5% (before costs), up from 1.8% at the start of the year.
In July the IFSL RC Brown UK Primary Opportunities fund returned 1.16% compared with 4.36% for the FTSE All Share and 5.75% for the IA UK All Companies sector.
Purchases
Digital 9 Infrastructure
Digital 9 invests in digital infrastructure assets that facilitate global data transfers quickly and reliably. It owns assets such as subsea fibre cables, data centres and mobile phone masts. We acquired the shares at a discount as part of a £60m placing to provide funds to expand the portfolio of assets. The shares provide stability and an attractive dividend yield. It is a constituent of the FTSE 250.
HICL Infrastructure
HICL invests in a portfolio of over 100 infrastructure projects across Europe and North America. Projects include hospitals, roads and renewable energy with the common theme being that the assets are critical to the functioning of society. We acquired the shares at a discount as part of a £160m equity raise to fund further projects. The shares offer stability and an unusually low correlation to the equity market. With a market capitalisation of over £3bn, it is one of the larger constituents of the FTSE 250.
Dechra Pharmaceuticals
Dechra is a FTSE 100 drug company focused on the veterinary market. They have been a major beneficiary of pet ownership globally and offers defensive growth qualities. We added to our existing holding as part of a £180m placing to fund the anticipated acquisitions of 2 companies which we anticipate will be earnings enhancing in years to come. The shares were obtained at an unusually large 8% discount for a FTSE 100 company. Current market conditions mean that investors can often obtain larger discounts than normal when companies raise money which will benefit shareholders in the fund longer term.
Aviva
Aviva is a FTSE 100 insurance, savings and investments company. Whilst it is relatively rare for us to purchase companies in the secondary market, we can and will do so at times of market weakness, as we have seen recently. With an 8% forecast dividend yield, one of the highest in the FTSE, and a modest valuation – we consider the shares oversold and were content to increase our exposure to UK focused financials.
Sales
Given heightened market volatility and an uncertain outlook, we are content to hold a little more cash than normal. We currently have 8% of the fund in cash, awaiting new primary opportunities or to take advantage of any sharp market falls that may occur. Underperforming small caps Supreme, CMO and Team17 were sold. Given the recent infrastructure focused additions to the fund, we took profits in LXI REIT, using the proceeds to help fund the purchase of Digital 9 Infrastructure and HICL Infrastructure.
Cumulative Performance (Total Return %) – July 2022
| Fund/Benchmark Name | 3M to 31/07/2022 | 6M to 31/07/2022 | Year to 31/07/2022 | 3 Years to 31/07/2022 | 5 years to 31/07/2022 | Since Inception (28/05/1997) |
| IFSL RC Brown UK Primary Opportunities P Acc | -6.0 | -10.1 | -10.2 | 5.6 | 14.8 | 442.0 |
| Quartile Ranking IA UK All Companies | 4 | 4 | 3 | 3 | 3 | 1 |
| IA UK All Companies | -1.9 | -4.2 | -4.5 | 8.1 | 15.9 | 296.7 |
| FTSE All Share | -1.2 | -0.1 | 5.5 | 9.9 | 21.5 | 324.7 |
Source: FE: 31/07/2022
Cont.
Discrete Annual Performance (Total Return %) – July 2022
| Fund/Benchmark Name | Year to 31/07/2022 | Year to 31/07/2021 | Year to 31/07/2020 | Year to 31/07/2019 | Year to 31/07/2018 |
| IFSL RC Brown UK Primary Opportunities P Acc | -10.9 | 34.5 | -12.5 | 0.6 | 8.1 |
| Quartile Ranking IA UK All Companies | 3 | 2 | 2 | 2 | 3 |
| IA UK All Companies | -4.5 | 32.3 | -14.5 | -1.2 | 8.5 |
| FTSE All Share | 5.5 | 26.6 | -17.8 | 1.3 | 9.2 |
Source: FE: 31/07/2022
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.
