August 2018 FOR PROFESSIONAL INVESTORS ONLY Under the Bonnet Alex Savvides, JOHCM UK Dynamic Fund

Investment background a household level, there is much to be cheerful about. IHS Markit’s Household Finance index (HFI) registered its second Further strong economic data in July pushed global equity highest level since December 2016, an improvement in job markets to three-month highs whilst in the US the NASDAQ security for the first time since the survey began in 2009, the 100 reached a new all-time high. J P Morgan’s global strongest improvement in incomes in the survey’s history services PMI registered business activity rising at one of the and one of the fastest rises in spending since early-2015. fastest rates in over three years in June. The US remained Despite all of this, the warm weather and World Cup fever, the main driver of global services growth – output growth GfK’s confidence index fell by a further point in July to -10, as was the second fastest since April 2015 – but significant improvements in consumer views of their personal financial contributions also came from the eurozone (a four-month situation were more than offset by increasing concerns over high) and, notably, the UK (an eight-month high). Global the wider economic situation, combined with a declining growth in manufacturing was more muted as the effects of propensity to make major purchases. As we have written tariffs put pressure on input prices, whilst the prospect of many times before, certainty remains the missing link for further trade tensions weighed on business optimism. In the the UK economy. eurozone, this has led to a reversal of the positive momentum experienced throughout 2017, with June’s manufacturing Strategy update PMI posting an 18-month low of 54.9, down from 55.5 in The Fund underperformed in July returning -0.04% against May, as business optimism slumped to its lowest level in a showing of 1.09% by its the benchmark, the FTSE All- over two-and-a-half years. By the end of the month there Share Total Return index (12pm adjusted), representing were signs that these trade tensions might be peaking with total underperformance of 111bps. This marks the worst US President Trump and EU Commission President Juncker month of performance for the Fund since June 2016, the agreeing to commence talks on freer trade. month of the EU referendum. Whilst clearly a disappointing In the UK, July was marked by political turmoil. The news outcome, there were clear macro and technical effects on 7th July that Theresa May’s cabinet had reached a at play, leading share prices to not accurately reflect the “collective” agreement on the proposals for the UK’s future underlying operating improvements in many of the Fund’s relationship with the EU proved to be short lived. A string of holdings. resignations followed, including Brexit Secretary David Davis Allocation effects accounted for a third of the and Foreign Secretary Boris Johnson, in objection to the underperformance. Not owning British American Tobacco, softer negotiating stance that the agreement had outlined. AstraZeneca and Reckitt Benckiser provided a 70bp headwind, Despite accompanying fears of a party leadership challenge, as all three experienced marked share price increases post markets remained broadly unchanged, suggesting that their updates. The size of these share price moves were as investors continue to welcome a softer EU exit, regardless much a reflection of the corresponding sector performances of the political cost. Following Theresa May’s subsequent as they were of positive changes in the fundamental victories in passing the amended customs and trade bills, stories – in the case of British American Tobacco, volumes tabled by Brexiteer Tories, thereby fighting off the Remainer actually came in below analysts’ expectations. Consumer rebellion (albeit with a small majority), sterling depreciated goods and healthcare (sectors where the Fund has its 1.7% against the US dollar and 1.3% against the euro, largest underweights) had the biggest positive contribution whilst also temporarily pushing the UK 10-year Gilt yield to overall market performance in the month, as investors down to a low of 1.17% - its lowest level this year bar the sought defensive, overseas-earning stocks to hedge against Italian political crisis in May. Further Conservative ministers increasing fears of a hard Brexit outcome. Offsetting this, resigned, this time in objection to the harder negotiating the Fund benefited from not owning Glencore (+15bps), stance, leaving the total resignations related to the Brexit where the shares fell following news of a subpoena from the negotiations at eight in the month. We wrote in the Fund’s US Department of Justice in relation to a money laundering year-end review that the forthcoming UK and EU trade probe. negotiations would “no doubt cause plenty of volatility” (‘Under the Bonnet’, January 2018). As we draw closer It is disappointing that two thirds of underperformance came to the October negotiation deadline, it seems sensible to from stock selection, not least because it was a busy month believe this volatility will only intensify. for the Fund, with half of its positions providing updates. Contrary to the Fund’s overall performance, there were no The prolonged uncertainty surrounding Brexit continued notable negative updates to report. The largest contributor to shroud a strengthening underlying UK economy. July’s to underperformance in the month was Urban & Civic ONS data showed the jobs market breaking new records, (-29bps), where shares came under pressure following the with the employment rate reaching its highest level since placing of a 27.9% stake in the company that was previously records began in 1971 and the unemployment rate being owned by private equity. It is likely the resulting technical the joint lowest since 1975. Correspondingly, growth in real

weakness could last a couple of months given the scale of 2018 Under the Bonnet – August wages continued, with latest estimates showing an increase the placing. However, the ease at which it was executed (the of 0.4% excluding bonuses and 0.2% including bonuses. At

www.johcm.com Morrisons Civic remains a full conviction forposition the Fund. liquidity in theshares is awelcome development. Urban& for this managementteam,whilst theresulting increased book buildtookjustaday) illustrates theinvestor support As outlined previously (‘Under the Bonnet’, June 2018), the to structural growth markets outside theUKis encouraging. delivered this despite and through building out exposures revenues in theshortterm,evidence thatgrowth is being to face headwinds from lower margin single-source UK products drove thelatter. earnings continue Although the former, whilst demandfor robots its andsurvivability business on major government-funded programmes in and Global Products. It continued to win campaigns-based reported organic revenue growth in bothEMEA Services confirming trading as in line with expectations at this stage, improvements. unrewarded in share price terms cleardespite underlying There were a number of notable updates which went turnaround story. This distributor. increasing returns over very time. Itisstill early days in this market-leading this should, in turn, lead to good earnings growth and a path to at benefits” cost continue to highlight the scope for delivering “meaningful transformational plans for the business. Management seasonality of the business and the timing of management’s year numbers resulting from poor weather in Q1, the usual is encouraging in light of the H2 weighting to SIG’s full- underlying demandfor building products in theUK,which capacity for several years. statements suggest good Both resulted from production issues causedby operating atfull trading momentum. At Ibstock, meanwhile, the warning trade-its focused businesses,which experiencedgood DIY issueschainto its competitor with Wickes, rather than must be noted it that Travis Perkins’s warning was related the Fund) no doubt weighed on sector sentiment. However, materials peersTravis Perkins ownedby andIbstock(neither political turmoil in the UK. Profit warnings from construction concerns of a cyclical in slowdown,light especially of the profitability expectations for theyear, underlying this failed toallay investor management’s confirmed update also underperformed (-19bps). Whilst an interim trading Shares at stocks. the implications ofrising global trade tensions for industrial on fixated became market the as Fund), the for headwind underperformed All-Share the FTSE by 6.5% (a 27bp thismarkedDespite sequential momentum,theshares there being “tough trading comparators” in the quarter. performance given thecompany hadpreviously guided to previous quarter’s rate of 10%. This was an impressive earnings estimates as organic growth continued at the reported a strong Q1, analysts with having to upgrade The Fund’s largest Electrocomponents, also position, 3i also remains a top three inposition the Fund. a good pipeline of to opportunities generate future returns. and realisations in what is typically a quiet quarter, suggesting Encouragingly, there were also strong levels of investment largest holding, discount retailer Action, increased 7%. by strong portfolio earnings growth. The value of the on-quarter NAV increase of5%, driven predominantly 3i Group’s share price rallied following an impressive quarter- a top three forposition the Fund. analyst recommendations. Thiscontrarian remains position recommendations to four, representing still just 22% of all a recommendation and earnings upgrade atUBS, takingthenumberof‘buy’ from benefited former The Fund. the SIG, the speciality building products distributor, and QinetiQ’s Q1 trading update, whilst only 3i Group were the top two performers for the FTSE All-Sharethe FTSE index over the month. above, subsequently reversed theirgains tounderperform day of the interims but, in a similar vein to the examples activemillion customers. The shares rallied up 6% on the setanddatabaseof13.2 the existing price comparison skill APIs (application programming interfaces), so as to leverage creating electronic mortgageservices androlling outnew furtherwith growth optionality in forming new partnerships, the beginning ofwhatlooks tobeavery interesting story, growth any without further required. capital This ismerely driveleverssignificant to thereareclear months, 6-12 next experience optimisation in the rest of the business over the group revenues. Therefore, just by focusing on customer whichrepresents itself Services, less than 13% of total conversion in just six months. Energy is part of Home has already delivered 50% improvements in customer customer experienceoptimisation in their Energy offering Importantly, management divulged at the interims that was 4% in Q1 and 6% for Q2 (5% for the H1 as a whole). market-leading functionalities. Since then revenue growth four years replatforming entire its ITinfrastructure tocreate last the spent that had company gap the given unjustified expectations seemed significant a was This perpetuity. market believed they wouldonly achieve c.3%growth to user interface, yet theshare price atthetime implied the of 6-7%by theendofthis year through redeveloping the return the revenue growth run rate back to market levels can they confident are management Moneysupermarket’s for UK stocks is throwing up an array of new opportunities. such highgrowth stories, butthecurrent harshenvironment markets. The Fund rarely finds sufficient margin of safety in the time), market-leading business high with growth end at yield flow cash free 7% (c. generative cash highly a in opportunity tobuyinto amanagement changesituation optimise customer journeys. This provided a rare valuation in Manchester) in order to invest in the mobile offering and further operating programmers costs(50additional based below (9% flat be consensus estimates), as the relatively would new CEO took on FY18 for growth EBITDA that byprice collapsed over 20% following the announcement atthe end position of February its built initially after theshare inMoneysupermarket theFund.TheFund , anewposition Finally, there were encouraging interim results from how to generate future returns. cash providing powerfulmanagement with optionality over in termsofvalue creation. This is net another business with to high-single-digit levels in Q3 is particularly encouraging accelerated growth revenue that evidence thus RMS, being a numberofunder-earning thelargest assetswith ofthese months ago (‘Under the Bonnet’, June 2018), DMGT possess delivered RMS row, faster thanexpectedrevenue growth. Aswewrote two a in quarter third the for and, GDPR reacceleration in MailOnline’s advertising revenues despite looked uninteresting. Nevertheless, this within there was a organic growth in line marketwith expectations may have Similarly, headlines for DMGT’s Q3 results of flat nine-month position. contract work. QinetiQ remains the Fund’s fourth largest long-term its of result a as visibility revenue significant and 8x EV/EBITDA for a business a with net cash balance sheet shares remain an enticing proposition, in our view, at just www.johcm.com

Under the Bonnet – August 2018 and Wales2176004.Registeredand Floor,GroundNo: address: under England 6QB.Ryder RyderSW1Y 14 London in Street,Court, Registered Ltd. Holdings Broom Barnham of trademark registered a is Hambro® O J Ltd. Management Capital Hambro O J of trademark registered a is JOHCM® consent. written express FTSE’s without permitted is ICB licensorsaccept or its any FTSE licence. Neither liability for errors or omissions in the ICV. No further distribution of ® “FTSE” licensors. its is a trademark of the London Stock Exchange Group Internationalcompanies and is used byLimited under FTSE and/or FTSE in vest and by owned are it in rights all and (“ICB”) Benchmark Classification other of Performance Index. TR share classesmay varyAll-Share and is available 2017. © FTSE International on request.Limited (“FTSE”) FTSE The Industry FTSE Benchmark: reinvested. income GBP,net in A class share of NAV less liquid them potentially and more volatile. International. forSource:Note JOHCM/Bloomberg/FTSE return history: tend to be tradedcap companiesand these lessfrequently and in lower volumes than larger companiesmaking and is given on the understanding is not arecommendation.that it The Funds investmentinclude shares in small- investment.The information contained herein including any expression of opinion is for information purposes only value of investmentsand the income from them may as up goand down youas well may notgetbackyour original and regulated by theFinancial Conduct Authority. Past performance is no guarantee offuture performance. The Source:Issued JOHCM/Bloomberg stated. unless otherwise by J O Hambro Management Capital Limited authorised Index (12pmadjusted). Performance ofothershare classesmay vary andisavailable uponrequest. 23 October 2009 onwards, the Fund converted to JOHCM UK Dynamic Fund. All fund performance is shown against the FTSE All-Share TR FromforRyder Fund. is Dynamic 2009 UK October Court 22 to 2008 PerformanceJune 16 Note: period 2008. forJune the data 16 date: International. NAVSource: JOHCM/Bloomberg/FTSE of share classA in GBP, net income reinvested,net offees, as31 July 2018. Inception Past performanceisnoguaranteeoffutureperformance. 5 year discrete performance (%) JOHCM UKDynamicFund Disc Relative return Benchmark JOHCM UKDynamicFund re te 12monthperformanceto

31.07.2018 10.31 9.17 1.04

31.07.2017 23.86 15.33 7.4 0 31.07.2016 -2.9 0.97 4.06

7 31.07.2015 2.7 4.42 7.2 7 2 31.07.2014 10.91 4.32 6.31 www.johcm.com

Under the Bonnet – August 2018