IFSL RC Brown UK Primary Opportunities | Fund Update | September 2022
September: Market turmoil – but we continue to invest through the cycle
Last month we suggested August may be a summer lull before the storm (https://www.rcbpo.co.uk/news-articles/ifsl-rc-brown-uk-primary-opportunities-fund-update-august-2022/). Sadly we were correct in what proved to be one of the worst months for global equities since the Covid crisis emerged in early 2020. A 50bp rise in interest rates in the UK to 2.25%, would normally be the month’s main talking point. However it was the new government’s mini budget that sent UK equities and sterling into a spin. Unfunded income and corporation tax cuts along with the domestic energy price cap, spooked sterling with it trading close to parity with the US dollar at one point. The headline cut of the highest income tax rate (from 45% to 40%) which got many of the headlines (although cost comparatively little), was rightly scrapped. Optically it looked appalling and it is hard to fathom how a tax cut for the highest earners was going to generate any real growth in the economy. With further interest rate rises now a certainty, most people’s tax cuts will be more than eaten up by higher mortgage costs. We do not however share the current market’s view that interest rates are headed as high as 6% in 2023. Like many, we are watching closely for the government’s more detailed plans as to how it intends to pay for the tax cuts.
In the meantime, it does little to help the UK’s standing as a place to attract overseas investors. Investors should not lose sight of the even further depressed valuations on offer in the UK market following the latest market sell off. Balance sheets are strong and dividends attractive. The forecast dividend yield of the fund now stands at 3.8% (before costs), up from 1.8% at the start of the year as we have reduced our exposure to the more highly rated parts of the market in favour of dividend earners that we believe will continue to grow earnings and dividends in a rising interest rate environment. Whilst the outlook remains challenging and volatility is likely to remain elevated, we have seen signs of real market stress and dislocation over the past few weeks, which leads us to believe the UK equity market, may be bottoming and has seen us lower our cash holding in the fund to 7% (from as high as 10% recently).
This month we added Surface Transforms, which raised money for expansion and used the extreme market volatility to add St James’s Place to the portfolio.
In September the IFSL RC Brown UK Primary Opportunities fund returned -5.3% compared with -5.9% for the FTSE All Share and -7.1% for the IA UK All Companies sector.
Purchases
Surface Transforms
Surface Transforms is a designer and manufacturer of carbon ceramic disc brakes used in higher value cars. Whilst significantly more expensive than the widely used iron disc brakes, unlike iron discs, they last for the lifetime of the vehicle, resulting in less waste. They are also significantly lighter and with the growth of electric vehicles which due to their batteries are heavier, car manufacturers are increasingly looking at ways to reduce vehicle weight. We acquired the shares as part of an equity raise to expand production as the company is facing a growing order book. Having previously owned the shares last year, we felt this an opportune time to re-enter the stock. With the company trading strongly, given the difficult equity market backdrop, we were able to acquire the shares at materially lower levels than would otherwise have been the case and at a lower level than the previous equity raise in January 2021.
St James’s Place
SJP provides financial advice and wealth management services to individuals, predominantly in the UK. Whilst we acknowledge the company’s charging structure is relatively high, it has successfully grown its assets via its loyal customer base. We acquired the shares in the secondary market at a time of severe market distress where most equities were being sold off sharply. With the shares trading at lows for the year and with an attractive & growing dividend yield of over 5%, we believe the shares will recover well when some calm returns to markets.
Sales
Profits were taken in HICL Infrastructure and Microlise that had both performed well during the market turmoil. The large holdings in Unilever and Lloyds were trimmed on relative strength, along with FRP Advisory. Underperformers Tinybuild and Invinity Energy Systems were sold on share price appreciation following good news flow.
Cumulative Performance (Total Return %) – September 2022
| Fund/Benchmark Name | 3M to 30/09/2022 | 6M to 30/09/2022 | Year to 30/09/2022 | 3 Years to 30/09/2022 | 5 years to 30/09/2022 | Since Inception (28/05/1997) |
| IFSL RC Brown UK Primary Opportunities P Acc | -5.7 | -14.4 | -18.4 | -0.2 | 6.2 | 405.2 |
|
Quartile Ranking IA UK All Companies |
3 | 3 | 3 | 2 | 2 | 1 |
| IA UK All Companies | -5.0 | -12.8 | -15.3 | -2.2 | 3.2 | 256.4 |
| FTSE All Share | -3.5 | -8.3 | -4.0 | 2.4 | 11.3 | 292.9 |
Source: FE: 30/09/2022
Cont.
Discrete Annual Performance (Total Return %) – September 2022
| Fund/Benchmark Name | Year to 30/09/2022 | Year to 30/09/2021 | Year to 30/09/2020 | Year to 30/09/2019 | Year to 30/09/2018 |
| IFSL RC Brown UK Primary Opportunities P Acc | -18.4 | 40.4 | -12.9 | -1.1 | 7.6 |
|
Quartile Ranking IA UK All Companies |
3 | 1 | 2 | 3 | 1 |
| IA UK All Companies | -15.3 | 32.4 | -12.8 | -0.0 | 5.5 |
| FTSE All Share | -4.0 | 27.9 | -16.6 | 2.7 | 5.9 |
Source: FE: 30/09/2022
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.
