Fund Manager June 2021 Commentary – Lowland Investment Company

There was a rotation in the UK equity market during June, with cyclical sectors that had performed well calendar year-to-date (such as financials) underperforming, while defensive sectors such as healthcare outperformed. There may be a period of consolidation in the equity market following a cyclicals-led recovery after the positive vaccine news in early November.

There were no new positions established during the month, however we added to a number of existing holdings on valuation grounds including Direct Line, Tesco, Studio Retail (an online value retailer) and Ricardo (an environmental consultant). The only position sold in entirety was St Modwen Properties following an increased takeover offer from Blackstone. We also reduced the position in cycling and motor parts retailer Halfords following strong performance.

We continue to be encouraged by what we are hearing from companies of current trading conditions. In many cases, companies are reporting sales that have already recovered to (or in some cases are above) 2019 levels. This strength, aside from in the most affected areas such as civil aerospace, is broad across a number of end markets including advertising, construction and areas of consumer spending (such as car and home sales). This is a faster recovery than we, and many companies, were anticipating. This recovery comes at a time when many companies had substantially reduced costs during the peak of the pandemic last year, therefore there could be a faster than forecasted earnings recovery if current trading levels are sustained. However, this will depend on several factors including the final stages of ‘opening up’ the domestic economy, the progression of unemployment levels as the furlough scheme continues to wind down, and consumer willingness to spend their excess savings built up over the course of the pandemic.

A cyclical industry is a type of industry that is sensitive to the business cycle, such that revenues generally are higher in periods of economic prosperity and expansion and are lower in periods of economic downturn and contraction.

A defensive company is a corporation whose sales and earnings remain relatively stable during both economic upturns and downturns. Defensive companies tend to make products or services that are essential to consumers.

Metrics used to gauge a company’s performance, financial health and expectations for future earnings eg, price to earnings (P/E) ratio and return on equity (ROE).

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisor, or its employees, may have a position mentioned in the securities mentioned in the report.