IFSL RC Brown UK Primary Opportunities | Fund Update | June 2023
June: High inflation and further UK rate rises drag on UK market
UK markets failed to make headway, again materially underperforming other major markets such as the US, which continued to be buoyed by its strong mega cap technology sector as excitement over Artificial Intelligence (AI) continues to make headlines. With May’s inflation print remaining unchanged at 8.7%, the Bank of England raised rates by 50bps to 5%, their highest level since 2008. Whilst inflation is expected to fall later in the year, it is proving stickier than anticipated as food and wage inflation remain high. The concern is that wage inflation becomes entrenched, particularly with a tight labour market, making it harder still to bring inflation down.
On a more positive note, the UK economy is proving more resilient than expected and has confounded expectations that it would slide into recession this year. Household spending has remained resilient aided by falling energy prices, a strong labour market and savings amassed by many households during the pandemic. Higher interest rates, whilst good for savers, will bite into household disposable income as mortgages are renewed.
Whilst market conditions remain difficult for equity fund raisings, we have seen a pickup in activity this month, although remain highly selective when adding new companies to the portfolio. Midwich was added to the portfolio as part of a placing, and the holding in JTC was increased, also following a placing. The IPO of WeSoda was pulled, citing difficult market conditions. This would have been the largest London IPO for a number of years and we can’t help but feel that this was a missed opportunity for the seller to float a small part of the company in the expectation of obtaining a higher price for any further share sell downs, once the company had delivered a series of satisfactory results.
UK equity valuations remain at historic lows compared with the US. Companies are broadly meeting expectations and M&A remains a theme as overseas buyers pick off undervalued companies. The bid for Dechra Pharmaceuticals was confirmed, albeit at a price 5% lower than initially reported, following a profit warning by the company. The shares rallied on the news.
In June the IFSL RC Brown UK Primary Opportunities fund returned -0.6% compared with 0.1% for the FTSE All Share and -1.1% for the IA UK All Companies sector.
Purchases
Midwich is a leading trade-only audio and technology distributor. We have previously held the company in the portfolio when it IPO’d in 2016. The company has been a consistent performer and we participated in the £50m equity raise to fund an acquisition in Canada, increasing the Company’s North America exposure.
JTC is an administrator of funds and back-office support to clients across fund group, legal and accountancy industries. We like the high-quality recurring revenue of the business and view the current valuation of such a business to be modest. We modestly added to our existing holding by participating in what proved to be a heavily over subscribed £60m equity fund raise for the acquisition of a US business.
Sales
Digital 9 Infrastructure was sold in what has proved a disappointing investment as interest rates have risen, resulting in infrastructure funds future cashflows being less highly valued in a higher interest rate world.
Cumulative Performance (Total Return %) – To 30 June 2023
| Fund/Benchmark Name | 3m | 6m | 1yr | 3yrs | 5yrs | 10yrs | Since Inception (28/05/1997) |
| IFSL RC BrownUK Primary Opportunities P Acc | -0.3 | 0.6 | -1.1 | 15.6 | 5.2 | 78.2 | 429.8 |
| Quartile Ranking IA UK All Companies | 2 | 3 | 4 | 3 | 3 | 2 | 2 |
| IA UK All Companies | -0.8 | 1.8 | 6.2 | 24.0 | 7.9 | 68.8 | 298.2 |
| FTSE All Share | -0.5 | 2.6 | 7.9 | 33.2 | 16.5 | 78.0 | 339.0 |
Source: FE: 30/06/2023
Discrete Annual Performance (Total Return %) – 30 June 2023
| Fund/Benchmark Name | Year to 30/06/2023 | Year to 30/06/2022 | Year to 30/06/2021 | Year to 30/06/2020 | Year to 30/06/2019 |
| IFSL RC Brown UK Primary Opportunities P Acc | -1.1 | -10.9 | 31.1 | -9.3 | 0.4 |
| Quartile Ranking IA UK All Companies | 4 | 3 | 2 | 2 | 2 |
| IA UK All Companies | 6.2 | -8.5 | 27.7 | -11.0 | -2.2 |
| FTSE All Share | 7.9 | 1.6 | 21.4 | -13.0 | 0.6 |
Source: FE: 30/06/2023
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.
