IFSL RC Brown UK Primary Opportunities | Fund Update | June 2022
June: A miserable month to cap off a difficult first half of the year for global equities
June proved a month to forget for risk assets. Indeed, the FTSE All share lost 4.6% in the first half of the year. The FTSE 100 with its high weighting to energy and miners has held up relatively well compared to most other indices. (America’s S&P fell 20% – its worst first half of the year performance since 1970). However, the mid cap FTSE 250 (-19.4%), small cap (-15.1%) and AIM All Share (-27.5%) have materially underperformed the FTSE 100 (-1.0%). As an active manager, we always expect to be somewhat overweight in mid and small caps, which over time has benefitted performance. Nevertheless, this year it has proved problematic as investors have cut exposure to smaller companies and UK domestics due to their greater exposure to consumers whose spending power has been hit hard by rising commodity prices as a result of the Russian invasion of Ukraine, and rising interest rates. UK inflation now stands at 9% and is expected to rise further still before we start to see a slowdown in the rate of inflation.
Whilst the outlook is far from benign, we consider a number of growth companies that we hold that have been heavily marked down this year, now trading at values more akin to those of ‘value’ companies with little or no growth. In time, we expect good quality growth company valuations to recover as the uncertainty over inflation becomes clearer.
The number of UK companies receiving bids from private equity and overseas buyers confirms our belief that the UK market is cheap. With sterling having depreciated 10% against the dollar year to date, UK companies look even more attractive to the overseas buyer. Indeed, this month saw both Biffa and Euromoney rise sharply on takeover offers. With current depressed valuations, there is likely to be further M&A activity in the remainder of the year.
As ever, we like to have a well-diversified portfolio of 60-80 stocks across different sectors and market capitalisations. We are highly cognisant of the de-rating growth companies have seen this year and we do not know how long growth companies may remain out of favour or if further contraction in growth company valuations may occur. As a result, most of the primary opportunities we have participated in this year have been lower beta, higher dividend paying stocks such as Supermarket Income REIT, LXI REIT, Home REIT, & Duke Royalty. Whilst these stocks may not provide explosive growth and therefore sharply rising share prices, they all provide a dividend yield in excess of 4% and as a result of our primary opportunities approach, we have been able to purchase all at a discount to their prevailing share price. The forecast dividend yield of the fund now stands at 3.4% (before costs), up from 1.8% at the start of the year.
This month we added Bluefield Solar Income and FRP Advisory to the portfolio.
In June the IFSL RC Brown UK Primary Opportunities fund returned -6.6% compared with – 6.0% for the FTSE All Share and -7.1% for the IA UK All Companies sector.
Purchases
Bluefield Solar Income
Bluefield owns over 100 solar photovoltaic ‘farms’ across the UK and is at the forefront of enabling the UK to obtain a greater proportion of its energy from renewable resources. We acquired the shares, at a discount to the prevailing market price, as part of the £150m raise to fund further assets. The shares have provided stability and consistent growth since IPO in 2013. We view the dividend yield 6.3% on our purchase price as particularly attractive.
FRP Advisory
FRP is a professional services company offering restructuring, debt, forensic and pension advisory work for businesses with financial difficulties. We purchased the shares following a placing which saw the company raise fresh equity to bolster its balance sheet ahead of potential acquisitions and a sell down of management stock. Having bought the shares at a discount to the prevailing market price, the shares have risen further to stand at a 10% premium to our purchase price. We believe the company is well positioned for further growth and will be a beneficiary of the tougher economic environment ahead.
Sales
Given heightened market volatility and 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 MadeTech, Lamprell and Eckoh were sold. Chrysalis Investments and Auction Technology Group were sold as we cut some exposure to the most highly rated growth companies in the portfolio. We also took profits in Urban Logistics.
Cumulative Performance (Total Return %) – June 2022
| Fund/Benchmark Name | 3M to 30/06/2022 | 6M to 30/06/2022 | Year to 30/06/2022 | 3 Years to 30/06/2022 | 5 years to 30/06/2022 | Since Inception (28/05/1997) |
| IFSL RC Brown UK Primary Opportunities P Acc | -9.3 | -15.4 | -10.9 | 6.0 | 15.6 | 435.8 |
|
Quartile Ranking IA UK All Companies |
3 | 3 | 3 | 2 | 2 | 1 |
| IA UK All Companies | -8.1 | -12.7 | -8.3 | 4.2 | 11.1 | 275.3 |
| FTSE All Share | -5.0 | -4.6 | 1.6 | 7.4 | 17.8 | 306.9 |
Source: FE: 30/06/2022
Cont.
Discrete Annual Performance (Total Return %) – June 2022
| Fund/Benchmark Name | Year to 30/06/2022 | Year to 30/06/2021 | Year to 30/06/2020 | Year to 30/06/2019 | Year to 30/06/2018 |
| IFSL RC Brown UK Primary Opportunities P Acc | -10.9 | 31.1 | -9.3 | 0.4 | 8.6 |
| Quartile Ranking IA UK All Companies | 3 | 2 | 2 | 2 | 3 |
| IA UK All Companies | -8.3 | 27.7 | -11.0 | -2.2 | 9.1 |
| FTSE All Share | 1.6 | 21.5 | -13.0 | 0.6 | 9.0 |
Source: FE: 30/06/2022
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.
