It was a difficult month for performance; the Trust’s net asset value fell 1% relative to a 2% rise in the FTSE All-Share. The decline in Sterling meant international earners performed well while domestic stocks (on the whole) underperformed. This can be seen at the index level where the FTSE 100 outperformed the FTSE 250, Small Cap and AIM. There was also some M&A activity within the FTSE 100 in which we did not participate (Just Eat being taken over by Takeaway.com, and LSE buying data analytics firm Refinitiv).
At the stock level the largest (active) detractor from performance was industrial chain company Renold. This discovered fraudulent accounting in its gears business where profit had been overstated for several years. We have spoken to the management team and have maintained the position. The gears division could be disposed, leaving an industrial chains business with good market share and scope to grow margins over time (at a very low valuation). Aerospace components supplier Senior also performed poorly as a result of ongoing disruption caused by the grounding of the 737 Max, to which it is a large supplier.
The best performer during the month was textile rental company Johnson Service Group. This reported a positive trading update for the first six months of the year. Organic growth has continued to be encouraging and they are adding significant new capacity for hotel linen at a new facility in Leeds, due to open in 2020.
The largest purchase during the month was adding to the existing position in GlaxoSmithKline following an encouraging meeting with the head of their Pharmaceuticals division. Their pharmaceuticals business has had a disappointing R&D track record in recent years but under a new management team there are positive changes being made that should over time result in improved output from their pipeline. In the interim they have a new vaccine for shingles which is growing well and their consumer healthcare division provides a steady earnings stream. The largest sale during the month was reducing the (long held) position in Relx. This has performed well in recent years due to consistent sales and margin growth. As a result it has been revalued upwards and now trades on over 20x current year earnings, therefore we felt it was prudent to reduce the position.
It has been a difficult period for performance. There have been multiple headwinds including heightened uncertainty around the UK economic outlook (to which the Fund is more exposed than the benchmark) and heightened uncertainty around the global economic growth outlook (to which the Fund has significant exposure due to its large position in industrials). We think valuations are pricing in a significant degree of this uncertainty. The portfolio as a whole is trading on approximately 11.4x forward earnings with a 4.8% forward dividend yield. We think this valuation looks compelling, particularly the income opportunity relative to other asset classes.
Forward Earnings: an estimate of a next period's earnings of a company
Dividend yield: the ratio of a company's annual dividend compared to its share price