IFSL RC Brown UK Primary Opportunities | Fund Update | October 2023
October: Markets spooked – down but not out
The UK and other major markets experienced a difficult October as markets continued to fret over interest rates staying higher for longer in order to combat stubborn inflation. Economic growth, whilst slowing, remains resilient and the world is still adjusting to the sharp rise in interest rates over the past two years. The Israel/Hamas conflict further served to undermine investor confidence on concerns it could lead to a wider war in the Middle East. Oil prices initially rose before ending lower on the month though remain closely watched given the impact of energy prices on inflation. Inflation remained unchanged (at 6.7%) and is anticipated to fall to below 5% by year end.
Big Yellow Group and Tesco were added to the portfolio in the month. Given market uncertainty there are fewer fund raisings than we would expect at what is normally a busy time of year. This is likely to store up further fund raisings for 2024 and beyond.
UK equity valuations remain at historic lows compared with the US. It was a busy month for M&A in the small cap arena with The Restaurant Group, Kin & Carta, OnTheMarket and SCS all bid for – further highlighting the extreme attractiveness on the UK market to overseas buyers. Valuations are cheap and will not remain this low forever.
In October the IFSL RC Brown UK Primary Opportunities fund returned -4.6% compared with -4.1% for the FTSE All Share and -5.1% for the IA UK All Companies sector. The banking sector was a notable drag on performance as Barclays and Natwest reported lower than expected profits and warned that the net interest margin (the gap between what they charge on lending and pay out on savings) had peaked.
Purchases
Big Yellow Group is the UK’s largest self-storage developer and operator by space with over 100 stores. We acquired the shares as part of a £110m equity raise to fund further expansion. Interestingly the company cited that it is cheaper for it to raise equity rather than debt given current interest rates and we believe this to be a positive for a fund such as ours. The equity raise was done at more than a 20% discount to net asset value, the biggest discount it has raised money at in its history. We view this, along with a near 5% dividend yield, as an attractive entry point.
Tesco is the UK’s largest supermarket and a name we have not owned since 2012 given the intense competition in the market, particularly from the low cost insurgents, Aldi and Lidl. We have built a position of over 1% of the fund, taking advantage of recent market weakness following an excellent set of recent results. Whilst it remains an extremely competitive sector, we believe they are handling the threat of Aldi and Lidl and with food inflation now falling, the shares offer good value and a dividend yield of over 4%.
Sales
Haleon, BP and Shell were trimmed on strength – the latter two on an oil price spike. Underperformers Diversified Energy, St James’ Place, Big Technologies and CAB Payments were all sold.
Cumulative Performance (Total Return %) – To 31 October 2023
| Fund/Benchmark Name | 3M | 6M | 1Y | 3Y | 5Y | 10Y | Since Inception (28/05/1997) |
| IFSL RC Brown UK Primary Opportunities P Acc | -4.8 | -6.9 | 0.8 | 18.4 | 5.9 | 54.7 | 409.5 |
| Quartile Ranking IA UK All Companies | 2 | 2 | 4 | 3 | 3 | 2 | 2 |
| IA UK All Companies | -6.6 | -7.3 | 3.8 | 24.0 | 12.2 | 44.6 | 281.6 |
| FTSE All Share | -4.8 | -5.9 | 5.9 | 39.4 | 21.1 | 58.0 | 329.0 |
Source: FE: 31/10/2023
Discrete Annual Performance (Total Return %) – 31 October 2023
| Fund/Benchmark Name | Year to 31/10/2023 | Year to 31/10/2022 | Year to 31/10/2021 | Year to 31/10/2020 | Year to 31/10/2019 |
| IFSL RC Brown UK Primary Opportunities P Acc | 0.8 | -19.1 | 45.2 | -14.2 | 4.2 |
| Quartile Ranking IA UK All Companies | 4 | 3 | 1 | 2 | 4 |
| IA UK All Companies | 3.8 | -12.9 | 37.2 | -15.3 | 6.8 |
| FTSE All Share | 5.9 | -2.8 | 35.4 | -18.6 | 6.8 |
Source: FE: 31/10/2023
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.
