UK equities rose during September, with the FTSE All-Share rising 1.7% on a total return basis. Within this the best performers in the index were predominantly mining companies such as Anglo American and Glencore, as commodity prices including coking coal recovered. In this context the Trust underperformed, rising 1.3% on a total return basis, as we currently hold little in the mining sector. While we added to the sector towards the end of 2015 (which worked well), in hindsight we sold the positions in companies such as Glencore too early as we felt that market expectations (in areas such as the speed at which they would achieve asset sales) had risen too far, too fast.
The largest individual contributor to performance during the month was Avon Rubber, which performed well following news that one of its protective gas masks had won a significant order from a US police department. This was taken positively as it diversifies their exposure away from the Middle East and the US Department of Defence and there is potential for other cities to also place orders in the future.
Of the companies we own, among the largest detractors from performance was support services company Interserve following profit warnings from peers Mitie and Capita. We see little read across - Interserve are steadily working through their problematic energy-from-waste contracts.
The largest switch during the month was in the insurance sector, where we sold the position in Legal & General and added to our existing position in Prudential. In our view there is greater potential for earnings growth (and subsequently dividend growth) at Prudential, whereas Legal & General is already paying out the majority of its capital generation therefore potential for dividend growth is limited.
We are likely to be entering a higher inflation period in the UK given the fall in sterling, a further rise in the national living wage and rolling through the beneficial effects of lower commodity prices. With this backdrop it is increasingly important to pick companies that are specialists in what they do and that operate in industries with strong barriers to entry.