Latest trust commentary

Summary

In the final quarter of the year Fund’s NAV performance of -2.8% lagged the FTSE All Share TR return of -0.4%. Against the backdrop of the US election and UK budget, domestic, and small and mid-sized companies struggled to perform while larger UK-listed companies exposed to the US economy have benefitted from enthused market sentiment and a tailwind from US dollar strength. We have more exposure that the benchmark in mid-sized and domestically focused companies because we have found many mispriced opportunities here. We take a long-term view for our holdings and continuously review each company’s investment case. However, we continue to review our overall positioning and have made some initial changes including selling our real estate investment trust exposure in British Land.

Markets

The final quarter of 2024 was eventful from a macroeconomic and geopolitical perspective.

The new UK government delivered one of the most far-reaching budgets in many years with national insurance increases for employers plus National Minimum Wage increases leading to further weakness in share prices of the UK market’s domestic stocks. The government committed to infrastructure spending and the NHS, funded by tax increases. This could drive higher growth in the shorter term, alongside slightly higher inflation, slowing the pace of further interest rate cuts. Prolonged higher rates could boost banking sector earnings, but would weigh on commercial real estate, housebuilders and consumer spending on high value items. The government’s focus on planning reform could ease the process and have a multi-year benefit for sectors such as housebuilding, utilities and construction.

In the US Donald Trump’s election win for a second term enthused market sentiment for larger UK listed companies exposed to the US economy, with US dollar strength providing a further tailwind to the performance of the UK market’s stocks with significant US and international exposures.  Donald Trump’s pledge to significantly increase tariffs may disrupt global supply chains and trade flows, impacting UK exporters such as defence and engineering businesses as well as pharmaceutical businesses. His plans to end the war in Ukraine and unconventional cabinet appointments, such as Robert Kennedy Jr as Health Secretary, could bring additional uncertainty for sectors such as healthcare and defence.

Looking further ahead, however, capital market reforms and political clarity should make the UK market more compelling, especially to overseas investors. Valuations remain attractive, driving ongoing share buybacks and M&A activity.

Performance

The Fund’s NAV return underperformed the FTSE All Share TR over the three-month period to end December, returning -2.8% and -0.4% respectively.

Against the backdrop of the US election and UK budget, domestic, and small and mid-sized companies struggled to perform while larger UK-listed companies exposed to the US economy have benefitted from enthused market sentiment and a tailwind from US dollar strength. We have more exposure that the benchmark in mid-sized and domestically focused companies because we have found many mispriced opportunities here.

Our domestic exposure that underperformed included retailer and veterinary business Pets at Home. Rising employers’ costs announced in the budget hurt and the market also anticipated softer trading for the business. Housebuilder Taylor Wimpey and student accommodation group Empiric Student property also struggled. Sentiment weighed on the sector as the market digested Labour’s planning policies. Expectations of potential easing of planning restrictions did not come to full fruition. Utility SSE also detracted.

On the positive side, banks performed well during the quarter benefitting from the anticipated boost to financial markets from Trump’s win benefitting our position in Asian focused bank Standard Chartered.  was the largest contributor to performance. Another beneficiary of Trump’s election win and the subsequent strength in the US dollar was education publisher Pearson as a larger company with overseas exposure. Luxury goods business Burberry also performed well as their new CEO embarks on a turnaround strategy and we have added to the Fund’s position.

Outlook

Last quarter we awaited the outcome of the new UK government’s October budget and the result of the US election. The budget was one of the most far-reaching in many years with national insurance increases for employers plus National Minimum Wage increases key areas of focus for investors. In the US Donald Trump’s election win for a second term will likely have profound consequences for the US economy and global markets. US exceptionalism, in the form of higher economic growth, financial deregulation and reduced taxes, may be turbo-charged by Trump. In this environment companies with UK domestic exposure have underperformed in the latter part of the year while companies with US and international exposure have strengthened.

Low valuations coupled with sterling weakness led to a renewed surge in UK merger and acquisition activity in late November. Direct Line, Renewi and Loungers all received bids in one day. We expect M&A to remain a theme in 2025, given that valuations remain so compelling particularly in the small and mid-sized parts of the market. The financial strength of many UK companies has also enabled the expansion of sizeable share buyback programmes, across a broader range of sectors and company sizes than previously seen. This has two impacts. First, it underscores the attractive valuations of many of these companies. Secondly, it boosts earnings per share. The result is that the total shareholder distribution yield in 2024 (i.e. dividends plus buybacks) of the UK’s FTSE All-Share is 6% (vs 3.9% for the S&P500). UK dividends rose 2.3% on a headline basis in 2024 boosted by special dividends. The underlying total was down 0.4% on a constant-currency basis as share buybacks of £42bn-£45bn in 2024 have slowed dividend growth.

The financial return attractions of UK mid-cap companies are currently overlooked, but it is worth noting that the FTSE 250 has outperformed the S&P 500 over the past 25 years (in local currency terms). US exceptionalism, in the form of higher economic growth and stock market returns, may be turbo-charged by Trump. However high expectations and crowded positioning mean that investors could benefit by diversifying portfolios into lower-valued, out of favour assets. UK equities are a prime example. In our portfolio we remain focused on companies' long-term fundamental prospects. As active stock-pickers we add to companies on share price weakness where we have conviction in their long-term strategy and diversify the portfolio to seek to enable it to perform versus its benchmark and deliver on the Fund’s income objective whatever the macroeconomic backdrop.

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.