Lowland Investment Company Fund Manager Commentary – March 2022

During March the UK equity market made modest gains, with the FTSE All-Share rising 1.3% on a total return basis. Beneath this modest market rise the trends seen calendar year to date continued. Energy and basic materials performed well on rising (albeit volatile) commodity prices such as oil, while consumer discretionary underperformed in anticipation of the upcoming squeeze on household real disposable income. In this backdrop the Trust modestly underperformed its FTSE All-Share benchmark, with its net asset value rising 1.1% relative to a 1.3% rise in the All-Share. During the same time period the Trust’s AIC UK Equity Income peer group rose 2.6%.

Among the largest contributors to relative performance during the month was vehicle hire firm Redde Northgate, which reported trading ahead of market expectations for its current financial years along with a share buyback. We reduced the position following this news for portfolio balance reasons. Medical equipment supplier Convatec was also among the good performers – rising input costs (which are not unique to Convatec) had led to concerns that margins would fall in 2022, however the company guided to margins being flat to slightly up and this was enough for the share price to recover.

The weakest actively held performers during the month tended to be retailers, for example Kingfisher (the owner of brands such as B&Q and Screwfix) and Halfords. Kingfisher guided to earnings for the year ahead being approximately in line with expectations, however there continues to be a concern that consumer spending will markedly deteriorate as the year progresses.  While Halfords did not report on trading during March the share price fell due to the same concern. Our approach to investing in retailers continues to be that we favour specialists that are market leaders – both Kingfisher and Halfords fall into this category. In our view these businesses have attractive scope for sales and earnings over the medium term, however we cannot predict short term trading (it is unclear to what degree consumers will draw down on pent up savings during the pandemic or will curtail spending).

It is encouraging to see the UK equity market rise despite weakness in the bond markets (with the UK 10 year gilt yield, for example, continuing to rise during March). The UK equity market did not materially re-rate when bonds were performing well, therefore equities decoupled from bonds several years ago. It is, nevertheless, encouraging that this link appears to remain broken as bond yields rise. The reason, in our view, is that the UK equity market remains lowly valued relative to overseas peers. We continue to see evidence of this coming through in takeover activity within the portfolio – this month there was an agreed bid for financial holding Randall & Quilter.

Source: Bloomberg as at 31/03/2022