Mid caps rose over the period, despite ongoing Brexit uncertainty. UK equities performed well, as did equities in general amid central bank dovishness and an easing in US/China trade tensions towards the very end of the period under review. The FTSE 250 (ex Investment Trusts) index rose by 2.8% compared to a 3.3% return from the FTSE 100. Expectations for monetary policy shifted materially over the quarter, and notably so in the US where the market began to speculate that the Federal Reserve might now cut interest rates this year. Meanwhile, European Central Bank president Mario Draghi indicated that a new round of easing would be required if the economic situation in the eurozone failed to improve. Many of the market’s domestically-focused sectors underperformed amid renewed Brexit and political uncertainty.
Private debt, equity and credit specialist Intermediate Capital Group was our top individual contributor over the period. The group published robust full-year results, which further underlined the structural growth opportunity offered by private assets. Hobby and crafting business Games Workshop also performed very well. A trading update revealed that the company expected profit before tax for the year ending 2 June to be around £80 million. Subsequently, earnings forecasts were upgraded by c.15%. The company’s strong cash generation and attractive dividend policy of distributing truly surplus cash form part of our investment case. Mining royalty company Anglo Pacific, a sizeable off-benchmark position, also generated double-digit share price returns as a robust set of Q1 results further underlined the company’s ability to deliver sustainable growth from an increasingly well diversified portfolio of royalty assets. These assets give Anglo exposure to both the old and new economies, serving end markets from steel production (thermal coal, iron ore mines) to the emerging battery chemistry sector. The company, which focusses on less volatile royalties associated with a miner’s revenue line, enjoyed strong growth in royalties in Q1, which hit a new quarterly record. This was driven by royalties from the Kestrel thermal coal mine in Australia, where output is growing rapidly, and strong royalty growth from Anglo’s Canadian iron ore asset, due to robust iron ore prices.
On the negative side, Saga’s full year results (April) were poorly received, despite some sensible management actions including a dividend cut, a remnant of the group’s private equity ownership history. The insurance arm of the business is to have a strategic re-haul, focusing more on direct (rather than via price comparison website) policy sales and innovation in the form of a three year product. June’s AGM statement indicated promising early results from these self-help measures. Such initiatives, coupled with the delivery in June, on time, of Saga’s first cruise ship, Spirit of Discovery, could mean that we see stabilisation from here. On a more cautionary note, the statement noted that the tour operator side of the business is operating in a “competitive” market “affected by current political uncertainties”. Whilst the balance sheet is not as strong as we might like, cruise bookings are resilient, and this is a key tenet of the investment case. We expect that cashflows from the new cruise ships (a second is to be delivered in 2020) will help to underline the Saga brand strength, while paying down the associated debt. Globally diversified multi-channel fashion retailer Ted Baker was another negative in the wake of a profit warning. The warning followed company-specific issues after the departure of the founder CEO and tough trading conditions facing its UK clothes retailing business. Meanwhile, UK multi-utility provider Telecom Plus gave back some of its very strong share price gains of the previous quarter.
Following a recommended bid for the group we exited our position in BCA Marketplace, owner of the WeBuyAnyCar website. We also disposed of sportswear retailer JD Sports ahead of its promotion to the FTSE 100. UK tour operator Thomas Cook was sold given uncertainties around the balance sheet. We added serviced office space specialist IWG to the portfolio. We believe that its franchising opportunity, demonstrated by a deal it struck in Japan during the period, has been undervalued by the market. The far higher valuation of highly geared WeWork also provides a useful comparison for the stock. We also initiated a new position in internationally exposed direct marketing specialist 4imprint, which is benefiting from structural growth drivers and was promoted to the FTSE 250 during the period. Fast-growing media company Future was another new portfolio addition which gained entry to the FTSE 250 after upgrading to the premium segment of the Official List.
Recent surveys indicate that UK consumers are more confident about their personal economic situation than about the country’s general economic prospects. It appears that Brexit uncertainty has yet to have much of an impact on consumers’ outlook and overall household spending. In fact, household spending rose by an estimated £52.5 billion in 2018, following similar rises in prior years (source: Lazarus Economics). While spending on vehicles has fallen for structural reasons, UK households have spent more on clothing, furniture, restaurants and their pets in each of 2017 and 2018.
A strong jobs market, higher wages and tax changes appear to have underpinned spending. Wages are growing at the fastest rate since 2008, outstripping the rate of inflation which has moderated, falling to a two-year low in January. There has historically been a close correlation between real wage growth and retail sales and labour market data from the Office for National Statistics suggests that the backdrop for wages remains supportive. The UK unemployment rate is at its lowest since the 1970s.
Consumers should also get a boost to their disposable income this year from tax changes announced in last autumn’s Budget, in part funded by an improvement in the UK’s fiscal position as tax revenues have been strong. The chancellor significantly loosened the purse strings, with the Budget described by the Office for Budget Responsibility as the “largest discretionary fiscal giveaway” since the economic advisory body was created in 2010. Finally, tax revenues remain buoyant into 2019. As a result of these trends we are cautiously optimistic about 2019.
|Q2/2018 -Q2/2019||Q2/2017 - Q2/2018||Q2/2016 - Q2/2017||Q2/2015 - Q2/2016||Q2/2014 - Q2/2015|
|Net Asset Value||-1.8||11.7||27.8||-8.8||11.4|
|FTSE 250 ex Investment Trust TR||-5.9||11.2||21.5||-5.7||15.0|
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