The UK’s decision to leave the European Union helps pave the way to higher inflation, according to James Lowen and Clive Beagles of the JO Hambro UK Equity Income Fund.
Sterling has weakened materially since the Brexit vote, which increases the cost of imported goods and services. The managers expect this, alongside rising oil and commodity prices and increased government spending, to cause inflation to rise. In turn, this could make the yield available on bonds and ‘defensive’ equities (that have increasingly become to behave like bonds) appear less attractive – therefore causing their prices to fall.
The managers have positioned the fund with this view in mind. Their reluctance to invest in companies that have proven popular with risk-averse income hunters – namely consumer goods, healthcare and utilities companies – detracted from performance between June 2015 and June 2016 as these businesses performed well.
However, their stance has been vindicated somewhat since June. As inflationary pressures mount, bond yields have risen and the strong performance of bond-like equities has stalled. Conversely, sectors that have spent the past few years undervalued by other investors, such as banks, have performed relatively well.
The managers took advantage of share price weakness around the Brexit vote to top-up favoured holdings at reduced prices, adding to investments in brick maker Forterra, Lloyds Banking Group and Barclays. Following a 25% fall in the share price (August 2015 – August 2016) they also initiated a position in Savills. Best known for its high-end UK estate agency business, it is also a global leader in commercial real estate services. The shares fell heavily following the UK’s vote to leave the European Union, despite the majority of their profits being generated overseas, and the managers feel other investors have undervalued the business.
While the managers’ approach has been a headwind over the past few years, strong stock selection has enabled the fund to outperform its peers. Since the fund’s launch in November 2004, it has returned 195.2% compared with 127%* for the average fund in the sector. Past performance is not a guide to future returns.
|Annual percentage growth|
| Nov 11 -
| Nov 12 -
| Nov 13 -
| Nov 14 -
| Nov 15 -
|JOHCM UK Equity Income||22.09%||30.89%||0.99%||3.47%||7.03%|
|IA UK Equity Income||13.04%||25.2%||1.83%||7.66%||6.74%|
Past performance is not a guide to future returns.
Source: *Lipper IM to 01/11/2016
The managers expect inflationary pressures to prompt investors to shift their focus from expensive defensive companies, to the undervalued opportunities they favour. This would provide a welcome tailwind for the fund, which, combined with the managers’ good stock selection, results in an attractive proposition for investors, in our view.
The fund offers a historic yield of 4.63%, and the managers expect to grow this income over time although this is variable not guaranteed and not a reliable indicator of future returns. The fund maintains its position on the Wealth 150 list of our favoured funds across the major sectors.
Please note the fund carries a performance fee, details of which can be found in the KIID. The fund’s charges can also be taken from capital which increases the yield but reduces the potential for capital growth. The fund has exposure to higher-risk smaller companies.