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

Investment background all the headlines, no leadership challenge emerged. EU leaders went on to approve the withdrawal agreement Global equity markets generally stabilised in November, alongside a political declaration on future trade which, closing at price levels broadly similar to those at the although not binding, sets out some ambitions for the next beginning of the month. However, levels of economic round of negotiations. Despite all the political uncertainty and political uncertainty remained heightened and asset in the UK and a consensus view that Parliament would not markets remained skittish, with the Chicago Board Options vote through the agreement in its current form, sterling Exchange Volatility Index (VIX) monthly average for ended the month down just 0.2% against the euro and November little changed on October at 19.4. 0.1% down against the US dollar. Economic data continued to slow. The only bright spot was The reaction in the real economy to this heightened the JP Morgan Global Services PMI, which accelerated for uncertainty has been mixed. The UK services PMI the first time in four months – up from September’s two- showed the weakest upturn in new work since July 2016. year low – led by strengthening growth in the US. Even Meanwhile, the IHS Markit Household Finance Index this proved to be short-lived, with the subsequent flash painted a confused picture. UK households cast their US services business activity index falling to a two-month most upbeat expectation of future financial conditions low. Ongoing trade tensions continue to weigh on global for almost four years, given a rise in real incomes (0.9%, manufacturing, with JP Morgan’s Global Manufacturing excluding bonuses, year-on-year), but, on the other hand, PMI falling to its lowest level in almost two years. spending growth and job security perceptions remained China and the eurozone remained the geographies most negative for the fourth successive month. This picture of affected by trade tensions. The Caixin China composite domestic uncertainty was reflected in the FTSE 250’s 50bp PMI fell from 52.1 in September to a 28-month low of 50.5, underperformance versus the FTSE 100 over the month. as manufacturing production slowed and softer services Finally, global markets were dealt the additional uncertainty activity coincided with the first stagnation of new business of a falling oil price. The price of crude collapsed 22% in for nearly 10 years. In the eurozone, the flash PMI recorded the month after market concerns about oversupply were business activity growing at its weakest rate in nearly four exacerbated by Saudi Arabia heeding President Trump’s years as slower order book growth and falling exports were wishes and refraining from cutting production targets. accompanied by deteriorating optimism about the outlook, This weighed on the oil heavy FTSE All-Share Total Return rising costs and rising prices. This resulted in employment index, which fell 1.6%. In comparison, the FTSE World growth falling to a 22-month low. German manufacturing ex-UK equities index was up 1.8%, in sterling terms, over slowed to a near standstill, the weakest performance since the month. April 2013, whilst Italy registered a fall in business activity for the first time since 2014 as budget tensions continued. Strategy update US manufacturing remained relatively resilient despite trade The Fund underperformed in November, returning -2.40% tensions (the flash PMI reached just a three-month low). against a -1.68% return by its benchmark, the FTSE All- However, there were signs that slowing global growth may Share Total Return (12pm adjusted) index, representing a be beginning to affect the thinking of the Federal Reserve, total underperformance of 73bps. This underperformance with Chairman Powell commenting that US interest rates mainly came from declines in the share prices of the Fund’s are closing in on “neutral” levels. These remarks were holdings in UK financials , Lloyds Banking viewed by the market as an indication that policymakers Group and Aviva following the political uncertainty may soon be open to a pause in the programme of rate outlined above. On top of this, performance was also rises. Global bond yields subsequently fell, with the yield hurt by the marked impact of technical selling of The on the US generic 10-year Treasury reaching a two-and-a- Restaurant Group’s (TRG) shares following the approval half-month low. of the Wagamama acquisition by shareholders. In the UK, it was once again domestic affairs that dominated Although the shareholder approval of the Wagamama markets. Brexit negotiation uncertainty quickly turned to acquisition was closely fought, it was not as close as political uncertainty following the resignation of Dominic headlines would imply: 39.57% of votes cast were against Raab, the Brexit Secretary, in protest of the Cabinet the transaction but only 80.77% of shareholders voted, backing the draft text of the EU withdrawal agreement. implying the percentage of total shareholders against the Sterling immediately lost all its gains against the euro for transaction was closer to 31.96%. Even so, the highly the month as markets focused on the threat of a vote of dilutive terms of the rights issue, plus the size of the equity no confidence in Theresa May (since overcome) following raise, will have meant many shareholders were forced to further cabinet resignations (a total of seven MPs in the sell some of their TRG shares in order to raise capital month) and the possibility of even a general election. For to finance the take up of their rights. This is what likely Under the Bonnet – December 2018

www.johcm.com guidance guidance around Risk (RMS),Management the Solutions including Mailonline, is in for free anyway. Elsewhere, group, and we feel thewholeConsumerMedia business, the Print media business, is the lowest valued part of the conditions. The Consumer Media business, particularly this should not have come as a surprise given external revenue declines in Print may be seen as a disappointment, continued whilst Furthermore, accounting. venture joint became fully consolidated, having previously been under owned subsidiary. The associatedoperating coststherefore wholly- a became TV DailyMail as reduced only analysts, Consumer Media margins, one area of concern for in the round, to us they do a not downgrade.constitute there are many moving parts to the outlook. However, divisional outlook. Given the conglomerate nature of the group, the on commentary management’s with issue results as, despite beating forecasts for FY18, analysts took full-year company’s the following 10% fell price share Its extreme but management at needed to appreciate thegoodworkbeing undertaken by new patience – It seems be patience requiredwill in waiting for the market Trust offer on General & value Mail Daily currently theFund’s largest active position. look forward to updating you on their progress. QinetiQ is We group. of 50% be to revenues ambitions their international grow to and stated here from growth profitable capitalisation. market Management have set the foundations for sustainable and current the of 15% to equivalent bolt- on and acquisitions maintaining a net balancecash sheet important strategically of number a executing UK, leading the modernisation ofdefence testand evaluation in the growth, revenue organic 8% growth, order 9% delivering whilst achieved been all has this And theanticipated FY20. by offset (BPR) Rate Profit Baseline the than in changes from headwind more will that efficiencies drive to government contracts long-term to UK on moved been sufficient has work and year; last the over 31% to 26% from grown have revenues international contract; de-risk QinetiQ’s business: 90% of FY19 revenue are under illustrated how muchquite work management has done to political UK the environment that improve,will interim results last month certainty no still is there Although that were underway atQinetiQ. spending rather than on the fundamental improvements market to focus on the potential for a hiatus in UK defence lastthat ensuedafterthesnapelection year led the environment political UK tumultuous the 2017, in evident were this of seeds the believed year.Fund the this Whilst of beginning shares the since 42% the by market the with outperforming company, the of re-rating a to led also appreciation of these attractive characteristics has now visibility revenue and a continuation of strong cash generation. A wider improved diversification, geographic has delivered earnings upgrades this year, greater strategy growth management’s New rewarded. been has patience this that report to pleasing is It 2018). January performance of hoped we that year the cametoevaluating wouldpatience beavirtue whenit the of patience beginning the for at wrote We reward a – QinetiQ group. expanded now the of valuation the from Wagamama of added givento position its the complete virtually removal has Fund day.The the on fall price share 15% the to led QinetiQ &GeneralTrust n 08 ‘ne te ont – Bonnet’ the (‘Under 2018 in (DMGT). (DMGT). for Landmark modelling (the UK’s risk leading provider insurance of land leading and business), 3.5x sales for the events business, and 2x propertysales world’s a (the itself RMS sales is for 3x and situation), DMGT transformation of business 35% fascinating c. for accounts (which suggested that, assuming market value for we update, Q3 Fund’s the In approach. is relevant highly it a as business, this value to sum-of-the-parts use We transformation indeed! now.A £244m of surplus a to then £246m from gone has 2016 to net cash of £233m at FY 2018. The pension deficit FY at £679m of debt net from it taking sheet, balance the remaining stake in Zoopla. These sales have revolutionised the and business, property US a EDR, of sales the and – late 2016 – a statement of intent if ever we have seen one material, including the partial sell-down of place, taken ofthesetransactionsof businesses. Some have been has change material including thesale, partial sale orclosure of a number years, two just In manage effectively. businesses. There were simply toomany businesses to capital allocation on the group’s leading scale and scalable down the complex conglomerate structure and focus of running this Fund. A key partofthestrategy is toslim years 10 in seen have we that transformations strategic probably oneofthemostmarked and underappreciated DMGT isgoing through agenerational instrategy, shift previouswith commentaryover theyear. second source we think ofconcern, was entirely consistent Source: DMGT. value of DMGT. Events businessesalone account for thewhole enterprise we believe thatthevaluations ofEuromoney, RMS and the forfree.Yes,come that divisions of list the Informationto no change toforecasts, means wecannowaddProperty virtually despite 20%, c. of group the of remainder the of November), suggested a decline in the enterprise value and stake in Euromoney (results ahead of expectations in recent the for share price fall, which, due to the net cash balance sheet this Updating investments. start-up and Technology stakes small the Education of all plus and profit), £7m revenue, today), (£68m profit revenue, no (£80m although Energy £64m), profit (2018: £654m, Media revenue Consumer businesses: following the free search information), investors were effectively getting for Billions DMGT –extreme value onasum-of-the-parts -£2.5 -£2.0 -£1.5 -£1.0 -£0.5 £0.0 £0.5 £1.0 £1.5 £2.0 £2.5 valuation www.johcm.com Euromoney in

Under the Bonnet – December 2018 Fleshing this out, in our opinion the market currently ascribes zero value to the following: Mailonline, one of the world’s leading newspaper websites and probably worth 2-3x sales (> £300m of value?); the Daily Mail, and Metro, three of the UK’s pre-eminent newspapers; Landmark, the UK’s leading provider of land and property search information; Hobsons, a fast-growing US education technology business; and Genscape, the world’s largest network of energy market monitoring technologies. These businesses generated a combined profit of £130m in 2018. This is extreme value. Such extreme value credentials are very attractive to this Fund, but particularly so when combined with a management team targeted with and focusing on outing that value. This isn’t just about slimming down, it is about operationally improving the remaining businesses whilst increasing the revenue-generating capacity and operating cash flows of each division. And this is only done through investment, not just cost cutting. Each division is currently under-earning due to above the linerestructuring charges and increased investment. That point is seemingly lost in the way the market currently thinks about this group. Add in our understanding of the transformation strategy and likely capital allocation at Euromoney – a share which this Fund also owns and which offers further value creation opportunity for DMGT via its 49% stake – and you have an attractive recipe for generating superior shareholder returns in time.

JOHCM UK Dynamic Fund 5 year discrete performance (%)

Discrete 12 month performance to 30.11.2018 30.11.2017 30.11.2016 30.11.2015 30.11.2014

JOHCM UK Dynamic Fund -3.52 19.02 13.34 0.81 6.29 Benchmark -2.33 13.70 10.32 1.35 3.88 Relative return -1.22 4.68 2.74 -0.53 2.32

Past performance is no guarantee of future performance. Source: JOHCM/Bloomberg/FTSE International. NAV of share class A in GBP, net income reinvested, net of fees, as at 30 November 2018. Inception date: 16 June 2008. Note: Performance data for the period 16 June 2008 to 22 October 2009 is for Ryder Court UK Dynamic Fund. From 23 October 2009 onwards, the Fund converted to JOHCM UK Dynamic Fund. All fund performance is shown against the FTSE All-Share TR Index (12pm adjusted). Performance of other share classes may vary and is available upon request.

Source: JOHCM/Bloomberg unless otherwise stated. Issued by J O Hambro Capital Management Limited authorised and regulated by the Financial Conduct Authority. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and you may not get back your original investment. The information contained herein including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. The Fund’s 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. Source: JOHCM/Bloomberg/FTSE International. Note for return history: NAV of share class A in GBP, net income reinvested. Benchmark: FTSE All-Share TR Index. Performance of other share classes may vary and is available on request. 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 trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. Neither FTSE or its licensors accept any liability for errors or omissions in the ICV. No further distribution of ICB is permitted without FTSE’s express written consent. JOHCM® is a registered trademark of J O Hambro Capital Management Ltd. J O Hambro® is a registered trademark of Barnham Broom Holdings Ltd. Registered in England and Wales under No: 2176004. Registered address: Level 3, 1 St James’s Market, Under the Bonnet – December 2018 London SW1Y 4AH, .

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