June was a weak month for the Trust in absolute terms; the net asset value on a total return basis fell 1.9% relative to a 2.5% fall in the wider market.
The UK consumer is being squeezed. Inflation is running at a higher rate than nominal wage growth and this is impacting consumer confidence and spending. We are beginning to see this affecting some of our companies. DFS, for example, has seen a deterioration in sofa sales and as a result has lowered earnings expectations. We have maintained the (small) position as DFS is a market leader in its category and continues to be highly cash generative. However, it is a reminder that no matter how optically cheap a company looks on earnings multiples, in the event of a steep downgrade to earnings expectations shares are likely to fall materially (a steep downgrade is rarely ‘priced in’). We are currently wary of adding to UK domestic exposure for this reason.
Among the best performers during the month was Carclo, which makes LED lighting for ‘supercars’ as well as technical plastics. Carclo are winning good levels of work in their lighting business and are expanding their capabilities beyond ‘supercars’ to mass market models that should lead to good earnings growth in the future.
The largest individual detractor from performance was Cape, which provides services such as coatings and insulation primarily to the energy industry. The poor performance is we think a result of the recent fall in the oil price as well as poor results from peers.
We were a net seller during the month and gearing was brought down to 11%. Positions we reduced included Conviviality Retail, Headlam and Hill & Smith, all of which we like fundamentally but on valuation grounds thought it was prudent to reduce. Where we added to holdings it tended to be where we saw good income opportunities, adding to existing positions in Randall & Quilter and Redde.
Debt at fair value - a sale price agreed to by a willing buyer and seller, assuming both parties enter the transaction freely.