Laura Foll and James Henderson, Portfolio Managers of Lowland Investment Company, deliver an update on the Trust, highlighting the key drivers of performance over the month and recent portfolio activity.

Macro backdrop

We have always had a multi-cap approach to income investing, as this broadens the potential investment universe beyond a relatively select number of large UK company dividend payers. In recent months, this larger than benchmark position in smaller companies has been a headwind to the Trust's relative performance. The Trust's net asset value rose in May (0.7%), relative to a 0.7% rise in its FTSE All-Share Index benchmark and a -0.6% fall in its AIC UK Equity Income peer group.¹

Fund performance and activity

Among the largest contributors to performance was Morgan Advanced Materials, which is a top fifteen holding for the Trust and a company we have held for a number of years. It reported strong (11%) organic growth in the first quarter, surpassing its management's organic growth guidance of 4-7% for the full year -in other words the management team is implicitly assuming a sharp slowdown into the latter half of the year.¹ This conservatism in guidance is a trend we are seeing in a number of our holdings, as management teams seek to ensure (as best they can) that market expectations are suitably conservative in the face of an uncertain economic backdrop.

The largest individual detractor during the month was solid state battery company Ilika. The company reported that end demand for its miniature batteries would be heavily weighted to the medical devices industry, which requires a long lead time because of the necessary trials and regulatory approvals, therefore pushing demand further into the future. On a relative basis, Shell was also among the largest detractors as despite it being the largest position in the Trust, it is now 7.5% of the FTSE All-Share Index and continued to perform well in May as oil prices rose.¹

During the month, we took the opportunity to add to several smaller companies on recent share price weakness, including textile rental company Johnson Services Group, food producer Finsbury Food, and Scottish housebuilder Springfield Properties. These additions were funded largely by the sale of the position in Relx, which was sold for valuation reasons following good performance.

Outlook/strategy

It is undoubtedly a challenging backdrop for equity markets. Higher than expected inflation is causing cost of living pressures while the uncertainty of continued war in European and rising interest rates all mean that segments of the UK market have substantially de-rated this year and sentiment is broadly cautious. Despite this backdrop, we have kept the Trust's modestly cyclical positioning (the two largest absolute sector positions are industrials and financials). This is because in our view, there is currently a high price for relative 'certainty', with some defensive sectors (such as utilities) having performed very well and re-rated to above long-term average valuation levels. From a medium to long-term perspective, sectors such as industrials present the opportunity to invest in what are often market leading engineers with structural growth drivers such as industrial automation.

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1 Source: Bloomberg as at 31 May 2022