Latest trust commentary

Market Summary

UK equities rose over the quarter, driven by a rebound in the large UK-quoted diversified energy and basic materials groups. A number of domestically focused areas of the market also recovered from poor performances over Q2. This occurred amid signs of improving UK consumer confidence and hopes that base interest rates may have peaked. This helped to support mid cap equities.

The fund performed broadly inline with the FTSE 250 (ex IT) index.

Quarterly Overview

Stock selection within the consumer discretionary sector was one of our largest positive contributors over the period. This was due to a combination of zero weights to poorly performing airlines, tour operator TUI and cruise line group Carnival, and our holdings in direct marketing business 4imprint and special interest online media group Future.

4imprint shares leapt more than 15% on the back of very strong order growth revealed in the half-year trading update reflecting continued market share gains. Meanwhile, Future jumped almost 25% on the publication of a full-year trading update which indicated that audience growth is returning after a correction post Covid-19.

Defence group Babcock International performed well. The company’s final results underlined how it is benefiting from its unique nuclear exposure and a strengthened balance sheet as a result of the well-executed disposal  programme. Other top contributors included IT infrastructure specialist Computacenter (strong interim results) and food processor Cranswick which continues to display good pricing power (see How a sausage maker became a 200 bagger since 1991).

On the negative side, provider of high technology products and services Oxford Instruments performed poorly, as did buy-to-let lending specialist OSB following a profit warning. More broadly, our underweight to banks detracted over the period. Our large position in multi-utility Telecom Plus again suffered from profit taking as investors worried about the impact of lower/stabilised energy prices on its business. A trading update confirmed that the company continues to perform well operationally, and inline with expectations.

We initiated a new position in Johnson Matthey, a specialty chemicals company which has been developing sustainable technologies, and photobooth operator Me Group. We sold technical products and services company Diploma, ahead of its promotion into the FTSE 100, and disposed of our residual holdings in online gaming group 888 and specialist information, data and analytics company Ascential.

Investment Outlook

The outlook remains tough for many companies in a higher inflationary environment and we remain focussed on businesses with sufficient pricing power to withstand these pressures. On the positive side, the consumer remains in good shape as increased interest income is more than offsetting increased mortgage charges from higher borrowing costs. UK consumer confidence has improved and there are hopes that base interest rates may have peaked.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. 

Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings. 

The trust holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall. 

The trust Invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment trusts that invest in larger companies. 

The trust may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so. 

Investments such as warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting on paying the capital back to the fund. 

Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so. Investments such as warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting on paying the capital back to the fund.