Domestically-focused areas of the UK equity market, UK small and mid-cap (SMID) equities and undervalued UK funds performed very well following a landslide general election victory for the Conservative Party. The new government is set to use its large majority to take the UK out of the EU by 31 January 2020, entering a transition period when the next stage of negotiations will begin. The resulting reduction in political uncertainty was also reflected by a sharp recovery in sterling. More widely, economically sensitive areas of the market performed well after the US and China tentatively agreed a “phase one” trade deal and central banks continued to ease monetary policy.
Many of our retail holdings performed very well, in line with the wider sector, which was at the forefront of the recovery in domestically-focused areas of the UK equity market seen over Q4.
The sector was also supported by a combination of industry-specific factors, including a pick-up in UK consumer confidence towards the period end, the expected beneficial impact of stronger sterling on import costs and the ongoing decline in retail rents, which are a significant cost component of bricks and mortar retailers.
Petcare specialist Pets At Home and homewares retailer Dunelm built on the recoveries they enjoyed earlier in 2019 after they capped off the year with strong year-end trading updates. Hobby and crafting business Games Workshop also rallied sharply on the back of a robust trading update.
The improvement in sentiment towards UK domestic-focused stocks was also reflected in a very strong performance from housebuilder Vistry Group, formerly Bovis Homes – the company has changed its name to reflect the acquisition of Galliford Try’s Linden Homes and partnerships and regeneration businesses. Many of these shares remain overlooked and in our opinion their recoveries have further to run.
We also have sizeable positions in some unloved world class growth stocks, including internationally diversified thermal processing specialist Bodycote and global-leading instrumentation and controls business Spectris. Both performed very well, in line with other economically sensitive areas of the market. Oversold ground engineering specialist Keller responded positively after the former CFO was appointed to the permanent CEO role.
IT infrastructure specialist Computacenter performed very well on the back of a strong year-end trading update in which the company said 2019 results will be well ahead of market expectations. Self-storage specialist Safestore was another top contributor following a robust year-end trading update.
Not owning exploration and production company Tullow Oil was our largest positive contributor following a disappointing exploration update for its Guyana prospects and after the company cut production guidance due to production performance issues.
Although we can point to many successful retail stocks in the portfolio – indeed, Dunelm and Pets at Home were among the best performing UK equities overall in 2019 – fashion retailer Ted Baker was a negative in the wake of a further profit warning. The alert was driven in large part by ongoing company-specific issues, but also reflected how conditions remain tough for many traditional retailers, and particularly those with significant High Street store footprints.
Consumers now have much more choice, so retailers have to be smarter considering the competition posed by online disruptors such as Amazon and numerous, more nimble new competitors. Some major bricks-and-mortar retailers continue to suffer a sharp sales slowdown, but among businesses that are better adapting to the structural shifts reshaping the High Street, the news remains encouraging; many have capitalised on their competitors’ weaknesses. In our opinion, stock selection and an active approach will remain key for investors in the retail and other sectors which we believe are being overlooked by the market. In our view, performance dispersion within such sectors – the difference between the best and worst-performing stocks – is likely to remain high as the market comes to reassess their prospects.
Our holdings in the oil services sector – Petrofac and Lamprell – lagged, in part due to poor sentiment towards the wider oil and gas industry, despite positive long-term fundamentals. Alternative investment manager Man Group and marine service specialist James Fisher & Sons, failed to participate in the very strong market recovery seen over Q4, although they both performed well over the preceding three quarters of 2019.
We took profit in home emergency services company HomeServe following a very strong run and added to our positions in gaming software group Playtech and payment terminal provider PayPoint. We exited Jupiter Asset Management and added to our holding in alternative investment manager Man Group. We took advantage of price weakness to initiate a holding in drinks manufacturer AG Barr as the outlook for the company’s products appears to be better now than it has for some time. In particular, the group’s ready to drink nitro-infused cocktails are a potentially exciting growth area.
UK SMID equities have outperformed other areas of the stock market over the long term. We expect this trend to continue. The recent pick-up in UK mergers and acquisitions (M&A) is particularly focused on SMID companies. In the past they have attracted a relatively greater part of the M&A pie, a trend that shows little sign of changing.
In a rapidly-evolving world, SMID companies are generally better able to capitalise on new opportunities as they tend to be more dynamic, and have a smaller base than their large counterparts have from which to achieve growth. M&A activity helps make room for the next tranche of exciting small company shares to emerge.
The pick-up in M&A is also telling on another level. A number of SMID companies on the receiving end of bids have been domestically focused. This suggests that the value which can be found in spurned UK domestic quoted stocks relative to an equity market which has reached historic highs has not gone unnoticed by all market participants.
In our opinion, the recovery in overlooked parts of the market has further to run. With regards to domestically-focused stocks, we take comfort that the UK economy is not in dire shape. Recently released data from the Office for National Statistics show that growth in household spend (three quarters of all spending in the economy) continued in 2019. It would also appear to us this growth is reasonably sustainable, underpinned by a strong jobs market, real wage growth and lower taxes.
We will continue to seek companies demonstrating organic growth and pricing power where possible and to avoid companies with too much debt. Disruption continues to be a feature for a lot of companies, putting pressure on earnings for a number of sectors, and we will therefore endeavour to identify and avoid these companies.
|Q1/2015 -Q4/2015||Q1/2016 - Q4/2016||Q1/2017 - Q4/2017||Q1/2018 - Q4/2018||Q1/2019 - Q4/2019|
|Net Asset Value||14.6||2.5||24.7||-15.5||35.4|
|FTSE 250 ex Investment Trust TR||12.0||5.1||18.2||-15.2||30.8|
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.
The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.
The Company will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.
As a result of the fees and finance costs being charged partially to capital, the distributable income of the Company may be higher but there is the potential that performance or capital value may be eroded.
The Company 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.