The Fund aims to achieve long-term capital growth and to generate a dividend yield that is above that of the FTSE All-Share Index average. The Fund focuses predominantly on stocks within the FTSE 350 Index that generate a prospective yield above that of the FTSE All-Share Index average. The Fund's performance benchmark is the FTSE All-Share Total Return Index denominated in sterling.Please note that for capacity reasons the Fund is now 'soft-closed' to new direct investors.

Economic developments

The narrative around the ‘cost-of-living crisis’ in the UK has been unrelenting in the media over the last 3 months and, as such, it is worth spending some time on the interplay between inflation, wage growth and Government policy. 

Firstly, there is no dispute that Inflation is running at historically elevated levels. In April, CPI rose by 9% year on year and notably increased by 2.5% between March and April alone.  Over 50% of this monthly increase was driven by energy prices with electricity up 54% and gas 96%, though motor fuels contributed a more modest increase.   

Secondly, nominal wage growth continues to accelerate, reaching 7% annual increase in Q1 2022.  In March alone, nominal wages rose at a 10% annual rate, with an almost 12% rise in the private sector. With vacancies still running at elevated levels and the HMRC data showing a further 0.4% increase in payroll employment in April, it seems highly likely that nominal wage growth will accelerate further over the summer. As such, the real wage squeeze may not prove to be as material as many media commentators suggest. 

Thirdly, the whole debate had assumed no offsetting Government action but this was proven incorrect by Rishi Sunak’s announcement on 26 May which amounted to a £15bn injection into household finances, equivalent to around a 1% increase in the average household’s disposable income. 

Clearly, real economic growth will continue to slow, but here again you need to be careful about the raw data being reported. For Q1 the reduction in COVID-related activities reduced underlying GDP growth from around 2.2% to 0.6%.  We believe consumer activity will hold up better than expected, helped by the c. £240bn of accumulated savings, but that progressively the spend will switch from goods towards services and experiences. Barclaycard data suggests that is already beginning to happen.  

Performance

The UK market continued to outperform other developed market indices as the clear valuation attractions are beginning to be recognised in an era of rising interest rates, registering a positive return of 1.26% in May. The fund outperformed during the month, recording a return of 3.03%.  Year to date the fund is up 2.19%, ahead of the Index return of 1.86% and the peer group of 0.72%. Looking at that peer group, the fund is ranked 2nd quartile within the UK Equity Income sector so far in 2022. On a longer-term basis, the fund is ranked 1st quartile over three, five and ten years and since launch (Nov 2004). 

During May, particularly the last two weeks, markets began to focus on valuation once again, rather than just the slowing momentum of economies and this led to a recovery for some of our stocks.  Within financials, all of the banks were positive contributors, with Barclays up around 15%, helped by the resolution of their administrative filing error and the commensurate start of their share buyback.  Standard Chartered was also up more than 10%, assisted by the expectation of further US rate rises. Our life assurance stocks were also healthy contributors, responding to higher bond yields as well as very low valuations. 

First Group received a conditional offer from a private equity group which saw the stock up around 20% - the offer is both relatively low and includes a conditional element dependent upon realisation of some assets in North America. Given this is the second private equity move in the sector this year, other stocks in the bus and rail sector moved higher too, including National Express. Elsewhere, Vodafone continued to recover, despite uneventful results, as investors focused upon the potential for consolidation in some of their operating jurisdictions. Vistry also rose by around 10% in response to a strong AGM update and the announcement of a modest share buyback.

On the negative side, Drax fell around 20% due to the imposition of the windfall tax on the oil and gas industry in the UK and the open-ended question of whether a tax will also be applied to the electricity generation industry in due course.  The relative impact on the fund was somewhat mitigated by a lack of ownership of SSE and Centrica which also fell on the news. Randall & Quilter was down around 35% as the bidder for the group withdrew their offer and the company re-iterated its requirement to raise capital; however, they also revealed that trading in the core programme management business remains extremely strong.  ITV and WPP were both weak due to the warning from SNAP, which suggested a slowing in advertising growth on their digital platform.     

Outlook

The dividend yield of the Fund for 2022 is currently forecast to be 5.5%. This would leave the Fund dividend per unit higher than it was pre Covid. The graph below shows the Fund dividend across the 18 years of the Fund’s life – it has only been higher during the financial crisis and as Brexit negotiation reached the point of maximum pessimism under the Theresa May government. Compared to both of those points in time, the yield on the Fund feels very robust – balance sheets are materially better, dividend cover ratios more prudent and as we have noted before around half the Fund is currently buying back shares reflective of these circumstances. 

Dividends used to be considered the vanguard of annual returns. The decline in the importance of dividends over the last two decades is due to the suppression of interest rates since the Global Financial Crisis (GFC). Cheap, practically free, debt capital has encouraged investors to pursue long-duration stocks. The reversal of this trend has come suddenly, and to a large extent unexpectedly, but it has shattered consensus positioning around growth stocks and investors are having to re-think a generation of received wisdom.

This regime-shift, in our view, has only just started. In these conditions, the UK equity market with a high starting dividend yield, strong companies, a heavy weight in real assets (eg mining, oil, property etc) starts looking very much in tune with current trends – more normal interest rate structures – and its outperformance year-to-date makes perfect sense. 

A cash yield also provides protection against inflation – it is feasible that the average rate of inflation over 2022 and 2023 will be c. 5-6% as inflation peaks this year and falls as energy price increases are lapped. The dividend yield on the Fund – at 5.5% - noted above – offsets this - protecting value in real terms. 

We have previously observed that valuations within the Fund are close to all-time lows on an absolute basis. On a relative basis, due to a rush to safety, we are also back to the widest gap in valuation terms between the type of stock the Fund owns and defensives that now dominate the FTSE indices. There is material upside in the Fund and significant valuation risk lurking under the surface in certain large index components. Whilst waiting for this upside to feed through the yield both provides protection against inflation and as it has done, over the longer term, the majority of total return. The ongoing regime change should lead to a renaissance of both the UK and the UK Equity Income Sector.

Data shown net of fees, net income reinvested. Please note that all fund performance is shown against the FTSE All-Share TR 12pm adjusted. Performance of other share classes may vary and is available on request.Where shown, monthly returns table shows compounded discrete monthly performance.

FTSE International Limited (“FTSE”) © FTSE 2017. The Industry Classification Benchmark (“ICB”) and all  rights in it are owned by and vest in FTSE and/or its licensors. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. Neither FTSE, nor its licensors accept any liability for any errors or omissions in the ICB. No further distribution of ICB is permitted without FTSE’s express written consent.

Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The annual management charge is deducted from the capital of the Fund. This will increase the income from the Fund but may constrain or erode potential for capital growth. The Funds investment include shares in small-cap companies and these tend to be traded less frequently and in lower volumes than larger companies making them potentially less liquid and more volatile. 

The information set out below relates to the Irish-domiciled fund which has been established for this strategy. To date this fund has not yet been launched. The UK-domiciled fund follows the same investment approach but is not required to comply with the full requirements of SFDR and the Taxonomy Regulation.

Amongst other characteristics, the Fund promotes environmental and social characteristics and invests in companies that apply good corporate governance. JOHCM Funds (Ireland) Limited, the Fund’s manager has therefore categorised the Fund as meeting the provisions set out in Article 8 of EU Regulation 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”).  

J O Hambro Capital Management Limited (“Investment Manager”) seeks to invest only in companies that meet minimum sustainability practices and have a coherent and well-articulated approach to sustainability to remain relevant to their customers, investors and society in general. The Investment Manager recognises that companies which fail to do so will progressively struggle.   

In order to achieve the above, the Investment Manager uses ESG scores to assess and monitor its investments and seeks to exclude businesses that are rated as ‘CCC’ by MSCI ESG or are assessed as ‘non-compliant’ with the UN Global Compact.  When an investee company no longer complies with any of these standards, the Investment Manager will engage with that issuer for a period of up to 18 months to allow the company to implement the necessary change, otherwise the Fund will exit that position.  The selection criteria may not be disapplied or overridden by the Investment Manager. 

The exclusion criteria referred to above will be applied prior to making any investment and the Fund’s portfolio will be monitored for any investments which breach these exclusion criteria on a periodic basis. For this purpose, the Investment Manager will rely on data (and the ESG definitions aligned with that data) from its third-party provider, ISS, or such other source as the Investment Manager determines.  We utilise the UN Global Compact assessment of another third-party provider, Sustainalytics. 

In order to measure and monitor the environmental characteristics of the Fund, the Investment Manager will review the carbon footprint of the portfolio, the trajectory of change of its investee companies’ ESG ratings and environmental data published by those companies.  For the social characteristics of the Fund, the Investment Manager will review whether investee companies have implemented appropriate policies and structures to support sustainable business practices.   

Although the Fund may invest in economic activities that contribute to an environmental objective within the meaning of the EU’s Sustainable Finance Disclosure Regulation (SFDR), the Investment Manager is not currently in a position to assess the proportion, as a percentage of the Fund’s portfolio, of investments in environmentally sustainable activities which are aligned to the EU’s Taxonomy Regulation (TR) (Regulation (EU) 2020/852) and amending Regulation (EU) 2019/2088.

This is due to a lack of reliable, timely and verifiable data for the Investment Manager to make a full and accurate assessment of the investments of the Fund against the TR’s Technical Screening Criteria in respect of climate change mitigation and climate change adaptation. It is also important to note that given the geographical focus of the Fund’s strategy; companies within the investment universe might not be under any obligation to provide the data required under EU legislation.

As a result, the Investment Manager is unable to determine whether the underlying investments in the Fund contribute to climate change mitigation and/or climate change adaptation, or whether the Fund has investments in economic activities that qualify as environmentally sustainable pursuant to the TR. As such, it has been determined that, 0% of the Fund’s investments are in economic activities that qualify as environmentally sustainable under the TR.

The Investment Manager is keeping this situation under review and will revisit the TR disclosure requirements once sufficient data is available.

Investee companies must follow good governance practices. This requires investee companies to adhere to minimum standards in various areas including sound management structures, employee relations, remuneration of staff and tax compliance. The Investment Manager is a signatory to the UK Stewardship Code 2012. JOHCM has met the expected standard of reporting under the UK Stewardship Code in 2021 and has been approved as a signatory. As a signatory to the Code and the UNPRI, the good governance practices of investee companies are assessed by the Investment Manager prior to making an investment and periodically thereafter. 

The Fund uses the FTSE All Share Total Return Index for performance fee calculation purposes only and it is not, nor is it intended to be, aligned and/or consistent with the environmental and social characteristics promoted by the Fund.