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

Investment background year Treasury yields have risen by 46bps since the start of the year to the end of February, in the UK the 10-year After the explosive start to 2018 by global stock gilt yield is up by 31bps. The UK unemployment rate markets, particularly in the US, February was a poor for the three months to December was 4.4% whilst in and volatile month. The ongoing strength in economic the US it was 4.1%. Wage inflation in the UK, judged conditions, hardening evidence of inflationary pressures by average weekly earnings, rose by 2.6% in December and intensifying threats of faster interest rate increases and by 2.5% for the final three months, compared to finally spilled over to cause a but intense sell-off 2.9% wage growth in the US. UK inflation, driven higher in equities. by a weak , remained at 2.7% (CPIH) Although difficult to pinpoint the specific trigger for in January (or 3% excluding housing costs), whilst in the market fall, it was most likely a reaction to US the US it is at 1.7%. Expectations in the US this year wage inflation pressures emanating from the ongoing are for three interest rate rises, although noise around strength in the US labour market, made worse by the four increases is growing, particularly given hawkish recent rapid rises in the US equity indices. January non- comments in late February from Jerome Powell, the new farm payrolls, released on the 2nd February, grew by a Chair of the Federal Reserve. In the UK, expectations are further 200,000, ahead of the expected 180,000. More for one rate rise, around mid-year. importantly, though, this was accompanied by data Yet in many ways conditions might be tighter in the showing average hourly earnings growth of 2.9%. This UK. Labour supply is falling in the UK post the Brexit number was not only ahead of expectations but was also vote and productivity remains low. The vacancy rate the highest increase since the nadir of the financial crisis. in the job market is rising rapidly and wage surveys Coupled with continuing survey evidence of inflationary continue to indicate further salary growth. Recent pressures throughout the globe – the January global sterling strength has seen a stabilisation in inflation manufacturing PMI survey reported selling price inflation trends and expectations are for falls in the inflation rate at the second-highest rate in 80 months – it was perhaps this year. Notwithstanding a slow start to the year – inevitable that the inflation fears in the bond markets UK construction, services and manufacturing PMI data might spill over to equity markets. have all been lower of late – which will no doubt be Whilst the strengthening data was not new news it further affected by some extreme recent weather, GDP poured fuel onto an already nervous US , continues to remain resilient and was guided slightly which was still trying to digest the implications of the higher over the forecast period at the Bank of England’s Trump administration’s successful passing of the Tax February policy meeting. External demand continues to Cuts and Jobs Act in late 2017. Whilst positive to growth, drive the UK economy, with eurozone manufacturing hence strong equity markets, these reforms perhaps data continuing near all-time survey highs and the US imply a faster rate of interest rate normalisation. The economy, as discussed, still gathering momentum. US 10-year Treasury yield started 2018 at 2.4%, but Confidence is the missing link in the UK. The most recent by 16th January had risen by 6% to 2.54%. Between CFO survey paints the picture very clearly. In the 16th January and 2nd February, it rose a further Q4 2017, UK CFOs became as pessimistic about Brexit 12% to 2.84%, before peaking on the 21st February at as they have been since the referendum (see chart 2.95%, a year-to-date rise of 23% in just seven weeks. below). UK economic growth is their second major fear. In turn, after rising by 28% in 2017, between the 2nd Nevertheless, whilst still acutely cost-focused, measures and 26th January the Dow Jones Total Return Index rose of overall uncertainty amongst CFOs remain acceptable by a further 7.8%. But as the 10-year yield continued its and investment intentions to drive growth continue rise into February, the US equity market finally reacted, to be healthy. The potential rewards from executing with the Dow Jones Index subsequently falling by 8.8% a reasonable trade deal with the EU are abundantly between 1st and 8th February. Although recovering its clear and would unshackle the UK economy from the poise somewhat as the month progressed, the Dow still current drag of weak domestic demand. This would closed February down 4.0%. Other markets experienced make current expectations of one or two interest rate similar falls: the Nikkei 225 index was down 4.4%; the rises over the next 12 months seem rather conservative. DAX fell 5.7%; the FTSE World Index lost 3.5%; while Whilst the short-term outlook is tough, the risks high the FTSE All-Share was a relative outperformer in falling and international sentiment towards the asset class by 3.3%. extremely negative, UK equities are on sale and should

Conditions in the UK market remain governed by the therefore be of interest to any dispassionate investor. 2018 Under the Bonnet – March overriding uncertainty created by Brexit. Where US 10-

www.johcm.com 10% 20% 30% 40% 50% 60% 70% 80% 90% On the flipside, however, there has been abundant has M&A activity in early 2018. there however, flipside, the On to follow suit. are held in the portfolio) no doubt need whilst otherswill TalkTalk and Provident Financial (again none of which companies, including high profile rights issues by , year-to-date. each There have also been dilutive fund raisings from various 50-70% between down suffered, have that stocks the of few a just are own) we which AA Group, Mothercare, Dignity and Carpetright (none of of 2018 being higher than in the wholeofQ1 2017. Capita, weeks two first the in sector the in warnings profit remains extremely tough in theamount 2018, of with as did a third of general retailers. Theoutlook for retail 2017, in warning profit a issued sector services the support in companies According listed of quarter a businesses. under EY, just to challenged financially and/or government spending atstructurallycontinues tobite retailas uncertainty sectors, over UK consumer and predominantly in and generalthe supportservices 2017 there has been a rapid increase in profit warnings, Continuing the trend seen in the last few quartersof about balancesheetsandM&Aactivity seemedtorise. warnings picked up, the market becamemore discerning extreme divergence in performances as the rate of profit highly active month in market,the UK stock witnessing thevolatilityDespite February was a fascinating and and including and highly smaller idiosyncratic media positions, contribution in a tough month from some oftheFund’s Supermarkets Anglo American, 3i Group Fund’s larger holdings, including was helped by astrong contribution from someofthe was a positive for Stock selection asset allocation. (particularlygoods sector tobacco and household goods) this outperformance. A low to the allocation consumer mix of both stock selection and droveasset allocation A adjusted). (12pm index Return Total All-Share FTSE -2.29% versus a -3.34% showing by its benchmark, the The Fund fared relatively in February, well returning Strategy update Source: Deloitte CFO Survey. in business for environment overall the think who CFOs of % 0% the long term will the be longbetter/worse term will the UK if leaves the EU Euromoney 13% 2016 Q2 68% Sky, ,General Daily Mail & Trust 11% Long-term impact ofBrexit 2016 Q3 65% . It was also pleasing to seea positive . 14% 2016 Q4 66% Better 19% 2017 Q1 60% Sky and Worse , 8% 2017 (held), Q2 72% Wm Morrison 14% 2017 Q3 60% GKN 9% (now 2017 73% Q4

company hasbeenin disposal mode, in particular forestproducts market, for US$125m. Since thenthe bought RISI, a price reporting agency for the global Euromoney 2017, March In providers. data embedded quickly to transform their asset base, a with focus on in 50% moved have management below Euromoney 2016, December to Euromoney in stake its reducing of of their businesses. Since DMGT took the historic step of technological and regulatoryon various shifts parts at paceastheygrapple thetransformative with effects changing are All Fund. the of 3% c. up make currently space, Ascential media B2B the In markets andgreater M&Arevenue. year, a largerwith number accessingof clients the equity that revenuesits are considerably ahead of thecomparable confirmed February in statement trading A year. in particular, avery has experienced to the solid start and forconditions investment banks, both with and growth. An activemarket stock means good technological driving shifts a search for both protection companies challenged needing to diversify and attractivecompanies with valuations, strategically of M&A activity given the blend of underperforming their undisturbed share prices. Wea continuation expect takeoverapproaches, someatmaterialpremiums to TT Electronics held below), Fidessa, Laird,– see Stadium Group (by Moreover, the fact thatFox was ofthe seller awilling Premier League football rights at asubstantial discount. particularly so given Sky’s successful recentrenewal of there was strong strategic value in the broadcaster, including Sky, we felt this vindicated our opinion that the business. When Disney bid for certain Fox assets, underpriced both the actual and strategic value of bid for Skywasat an set opportunistic level that have always felt (and written) that21stCentury Fox’s in position the Fund Weat c.1% of theassets. small performance boostattheend of themonth. Sky is a The approach for invest ininformation services continuestopay off. as themanagement expectations, team’s strategy to results for 2017 were strong and slightly ahead of offers strong synergies with One Click Retail. Underlying Clavis Insight, an ecommerce analytics company that services informationprovider, Medialink, a marketing business, services and retail online an Retail, Click One This includes, in of the last18months, acquisitions growing digital data and marketing businesses. services faster- into businesses journals and events traditional recycling awaycapital from some ofthecompany’s Similarly, strategy. team toexecute and continue to supporttheir well reshape thebusiness. We are backing this management cash as position management consider their options to the group balance sheet in an extremely strong net for US$145m, a deal which whilst dilutiveinitially leaves the disposal Global of its Markets Intelligence Division announced Euromoney month, Last years. two roughly profits and thereby recouping overinvestment its twice in pre-tax 30x c. of multiple exit an representing US$135m, for Dealogic in stake 15% a selling recently Numis Ascential fared in a tough month. The three well stocks kicking off theyear extremely Numis, well. ) and GKN have recently all announced Sky management are systematically byprovided Comcast a modest Euromoney, DMGT www.johcm.com Barclays and

Under the Bonnet – March 2018 2176004. Registered address: Ground Floor, Ryder Court,14Ryder Street, LondonSW1Y 6QB. J O Hambro® is a registered trademark of Barnham Broom Holdings Ltd. Registered in England and Wales under No: FTSE’swithout express written consent. JOHCM® is a registered trademark of J O Hambro Capital Management Ltd. ICV.the in omissions permitted or is errors ICB forliability any of Neither accept distribution furtherlicensors No its or FTSE licence. under Limited International FTSE by used is and companies Group Exchange Stock the of trademark a is ® “FTSE” licensors. its and/or FTSE in vest and by owned are it in rights all and (“ICB”) Benchmark 2017. FTSE may© vary availableis (“FTSE”) and International Limited request.FTSE on Classification Industry The share class A in GBP, net income reinvested. Benchmark: FTSE All-Share TR Index. Performance of other share classes potentially less liquid and more volatile. Source: JOHCM/Bloomberg/FTSE International. Note for return history: NAV of companies andtend tobetraded these less frequently and in lower volumes than larger companies making them and is given on the understanding that it is not a recommendation. The Funds investment include shares in small-cap 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 authorised Limited Management Capital Hambro O J by Issued stated. otherwise unless JOHCM/Bloomberg Source: will deliver deal the some fast-growing that to confident feel We products. asaccess well as efficiencies, and offersstrong and, working in capital particular, cost inefficiently run been has Stadium synergies. cost and up the electronics value chain and offering both revenue importantly, makes it strategic sense, taking TT higher to the use of excess cash to buy these earnings. More of value due earnings-accretive, enterprise immediately is deal an The £58m. and £46m of value equity an 2017, announced the acquisition of Stadium Group for Q4 early in £120m c. for business sensors auto its sold the option to grow inorganically. excited, does but giveit the management teams weback Fund’s launch in 2008. This alone is notareason tobe investmentsare nearthebestwehave seensincethe amongstbalance metrics thecurrentsheet portfolio of strength.sheet We have been on record saying that the There iscurrently strategic value in having balance an intriguingandongoingsituation. higher offer from Melrose either or another party. This is bought FKIin when it 2008. Another scenario includes a previous experience ofthelatter’s turnaround capabilities recycle thecashcomponentinto Melrose, having had we would be happy totake more ofthebid and as stock If Melrose is successful bid in its on the current terms, under pressure todeliver and have a clear plan to do so. in position GKN, asthemanagement teamwould be were towalk away, we would happily increase theFund’s When toying we feel thescenarios with Melrose thatif as the Melrose interest is serving to accelerate change. us, worry not does investment first Fund’s the for price that attractssituation us. That weare paying a higher of type the exactly is and sight first at interesting looks new GKN management team, under severe pressure, interest.unsolicited The strategy tounlock value by the GKN atpacesince within the announcement of Melrose’s underlying restructuring that story has been kicked off If thebid fails, we are happy tobeexposedthe in January, we have since made a investment.small were not involved at thetime of theMelrose bid for GKN at The situation the Fund’s atthehigherlevel. position Disney respond toComcast’s offer. We have maintained there is further upside to the valuation here as Fox/ player to declare interest, its but even is, we believeit if of anotherbid for Sky. Comcast may notbethelast piece ofinformation. Since thenwehave beenhopeful to a thirdasset party was a new and very interesting GKN is similarly interesting. Whilst we TT Electronics , having JOHCM UKDynamicFund attractive attributes inthesetimes. generate superiorinvestment returns. Theseare very company the ethosofusing with technology built to help Man is a genuine active investmentmanagement tackled successfully. being within also are unit, long-only discretionary issues Man’s GLG, performance long-standing Elsewhere, AUMdeal, its with doubling under Man’s ownership. a long-only quantitativefund manager, wasa very good paid off in the last few years. The acquisition of Numeric, and efforts todiversify the business away from AHL have better than expected. Management are doing a good job Subsequent results for FY17on the 28thFebruary were shareits pricesell-off. fee forecasts for2018, December which further fuelled reappraisal and reduction in some analysts’ performance during the turbulence. This led to a surprisingly rapid primarily due to underperformance ofsomeAHL products equitythe was This month. the of part early the in during sell-off market taking profit heavy suffered which The biggest detractorin February was of dealswebackmanagementteamstomake. neverAlthough expect. are risk,these without thekind we as delivered are synergies the if 30-50%, of range extremely strong earnings accretion toTT Group, in the and isavailable uponrequest. (12pm mayvaryPerformanceadjusted). classes share other of Index performance TR All-Share fund FTSE the All against shown Fund. is Dynamic UK JOHCM converted Fund to the onwards, 2009 October 23 From Fund. Dynamic UK Court Ryder for is 2009 October 22 Note: Performance data for the period 16 June 2008 to as 28February 2018. Inception date:16June 2008. share class A in GBP, net income reinvested, net of fees, of NAV International. JOHCM/Bloomberg/FTSE Source: 5 year discrete performance (%) 1 year to year 1 to year 1 to year 1 1 year 1 year to year 1 to 28 28 29 28 28 Feb Feb 2015 Feb 2016 Feb 2017 Feb 2014 2018 JOHCM UK Dynamic UKJOHCM 24.67 28.97 - 4.32 8.81 8.23

Benchmark 13.14 23.09 - 5.70 4.96 7.53 www.johcm.com Relative 10.19 - - 4.78 3.67 1.30 0.76 return ,

Under the Bonnet – March 2018