AXA Framlington UK Equity Income Fund R GBP

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FUND MANAGER'S COMMENT 30/07/2021 FRAMLINGTONGBP EQUITIES AXA Framlington UK Equity Income Fund R GBP

Fund manager's report

Fund Performance

The Fund outperformed its benchmark, the FTSE 350 Total Return Index, in July. The Fund (Z class accumulation units) returned 1.2% compared to the 0.5% for its benchmark.

Themes July is always a busy month for corporate news flow as companies release half-year and full-year earnings prior to management teams and employees taking a well-deserved break in August. A few themes are emerging from our conversations with management teams which bear mentioning:

Inflation: One of the main determinants in recent months as to whether a company’s shares have performed well has been the company’s ability to pass on input cost inflation. The rise in oil and gas prices, and their derivatives such as petrochemicals, combined with ongoing logistical issues driven by COVID-19 are forcing up input prices for many industries. Other commodities have also seen price rises as the rebound in end market demand has outstripped supply. The price of copper has doubled over the last year and cement prices are up over 30%. This is putting pressure on companies to raise their prices to their customers. Unfortunately, it is not always a case of ‘one and done’. The brick manufacturers, for example, have signalled further double-digit price rises this autumn. Staff are demanding pay rises as well. Staffing company Robert Walters - not held - told us of high levels of wage inflation rippling through the system.

Reckitt Benckiser - not held - and Unilever saw their shares fall in July after admitting that cost inflation would negatively impact operating margins this year. Over time branded consumer staples companies have successfully passed on higher costs through increased prices, but typically with a lag of 6-9 months. Pricing power is an incredibly valuable attribute in this environment. Games Workshop has historically raised its prices by c.4% per annum, well ahead of its input costs, where raw materials such as plastic account for less than 10% of cost of goods sold. We continue to favour companies that have either shown a historical ability to raise prices at least in-line with inflation or are amongst the lowest cost providers in their space and so should benefit as their higher cost competitors are forced to raise prices.

Sustainability: There is far more scrutiny on a company’s sustainability credentials than at any time in history. Companies cannot afford to ignore environmental, social, and governance (ESG) considerations given the potential brand damage from falling short on contentious issues, regulatory censure from poorly designed policies, and the sheer flow of investors’ money into this area. We are seeing more companies embrace sustainability wholeheartedly and it was encouraging to hear from a few management teams recently that feel that since they have adopted more sustainable practices it has improved their products, helped them to engage better with their workforce, and increased their resilience.

One area where active investors can help companies is through engagement on ESG with their board and executive management. This may be as simple as offering an objective viewpoint on a remuneration issue or may be more involved where we feel the pace of change at a company is slower than desirable. We have engaged with a number of companies in recent months. We have found that the vast majority of companies are keen to engage on ESG issues in a desire to improve their understanding of the landscape and to further their own transformation. The fund management community has a big role to play in shaping future ESG policy and driving improved sustainability standards.

Low Yields. Despite the well documented rise in inflation, with UK consumer prices increasing by 2.5% year-on-year in June, which was the highest rate since August 2018, government bond yields have remained stubbornly low. UK 10-year and 30-year bond yields fell during July and ended the month at 0.56% and 0.99%, respectively. A similar phenomenon is happening in the US, with bond yields falling in recent months despite inflation picking up. This continues to put pressure on the net interest margins within the banks sector - we do not hold any banks, although provisions for poor credit taken during the first months of the pandemic appear overly conservative. At the margin, a ‘lower for longer’ yield environment is unhelpful to our non-life insurance holdings - low cost motor insurers Admiral and Sabre, and specialist property, energy and aviation insurer and reinsurer Lancashire - which retain substantial customer funds, on which they earn an investment return before customer claims are paid. However, this puts pressure on the underwriting side of the business to maintain pricing discipline as poor underwriting can no longer be bailed out by good investment returns. We believe good underwriters will attract premium valuations over time.

Digitisation: The pandemic has accelerated the trend from physical to digital across most industries. Businesses have seen the advantage of upgrading their systems to cloud-based ones, giving increased resilience and the ability to access programs from both work and home. Accounting software provider Sage issued a positive nine-month trading update. Subscription penetration has continued to increase, up to just below 70%, and recurring revenues accelerated to 5%.

* 1st NAV date: 23/02/2009 ** Benchmark : Please refer to the Benchmark section in the characteristics/disclaimers part of the document. Source(s): AXA Investment Managers - FTSE as at 30/07/2021 Editor: AXA Investment Managers Paris

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FUND MANAGER'S COMMENT 30/07/2021 FRAMLINGTONGBP EQUITIES AXA Framlington UK Equity Income Fund R GBP

Similarly, RELX, a leading business information and analytics tools provider, saw first-half revenues grow 4% and combined with judicious cost control, operating profits grew 11%. The interim dividend was raised 5%. Both companies offer digital products and decision-making tools that increase the productivity of their users. We are naturally drawn to companies offering subscription products that offer value to their user in excess of the monthly cost and have high costs to switch to a competitor. Imagine having to do your business’s tax returns by hand. It doesn’t bear thinking about.

The strong get stronger: In much the same way that Winston Churchill advised not to let a crisis go to waste, we have added two holdings in the last nine months that we believe have taken advantage of disarray amongst competitors to increase their competitive positions. We added holdings in Compass Group, the leading international foodservice company, and Greggs, a low-cost food-on-the-go producer and retailer. Greggss’ revenues are already back to pre-pandemic levels as it has rolled out its products on the Just Eat food delivery website, with delivered goods now accounting for nearly 10% of group sales. It has also taken leases for new shops in areas that were previously unaffordable due to rent cuts on the high street. Profits are recovering fast and encouragingly the dividend was recommenced with the interim results.

Similar to the period post the global financial crisis in 2008/09, Compass’s management is seeing a ‘flight to trust’, with an upturn in clients wanting to outsource their catering operations for the first time. Compass raised £2bn in May 2020 to facilitate new business growth. Given the considerations of hygiene and reputation are so prevalent for potential customers, the equity raise has put Compass on a strong footing to win new business from smaller ‘mom and pop’ competitors. The company noted that 50% of new business wins in the recent quarter came from first-time outsourcers and year-to-date the retention rate remained strong at 95.4%.

Asset gatherers: In common with many other countries, the UK’s household savings rate increased during the pandemic as everyday expenditure, such as travel to work and on leisure pursuits, was curtailed. Clients have invested surplus income into long-term savings products such as equity funds. The Fund’s holdings across the asset gathering space in wealth manager St. James’s Place, fund management firm Polar Capital, and fund platforms Integrafin and Hargreaves Lansdown, have seen strong equity markets and positive fund flows buoy their assets to record levels. In general, the asset gathering firms have added a younger demographic of customers, which in an industry known for its client stickiness, will translate into a longer tail of revenues over time. The main piece of negative news has been in respect to lower yields that we referenced above. This has diminished Hargreaves Lansdown’s interest earned on £13bn of client cash deposits that it splits between the clients and itself. On the positive side, Hargreaves Lansdown continues to be the dominant retail investment platform and has grown its customers over 300,000 over the last 18 months to 1.6mn, improving its market share to over 43%. Hargreaves Lansdown raised its full-year dividend, excluding the special dividend from the sale of Funds Library, by 8%.

Update on the Fund’s distributions As a reminder, the Fund’s distributions for the 12 months to the end of March 2021 fell by 16% (Z class income units), compared to the FTSE All-Share Index, which fell 34% over the same time period. We haven’t got the luxury of having any reserves, but I feel this somewhat vindicates our investment process to seek out resilient businesses that can survive the tough times and thrive in the good times. We aim to grow the Fund’s dividend in real terms and ahead of the market over the medium term.

We declared the distribution for the first quarter of the Fund’s year - the quarter ending June 2021. Encouragingly, income earned per unit was up a minimum of 9% depending on the class of share. In addition to this we have had a number of holdings return to the dividend list in recent weeks such as Greggs and PageGroup, earlier than we had expected, which is good news. We are mindful of not disappointing our unit holders and felt it prudent to only raise the first quarter distribution by 5%. We will gain more clarity as the year progresses and being a unit trust we must pay out all income generated at the end of the year. We are hopeful of a good year for income growth, although cannot guarantee it.

Performance evolution (in GBP) Annualized performance 1 Y. 3 Y. 5 Y. 8 Y. Launch Portfolio* 19.22% 3.18% 5.12% 5.06% 9.56% Benchmark** 25.90% 1.49% 5.53% 5.27% 9.76%

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FUND MANAGER'S COMMENT 30/07/2021 FRAMLINGTONGBP EQUITIES AXA Framlington UK Equity Income Fund R GBP

Cumulative performance 1 M. 3 M. YTD 1 Y. 3 Y. 5 Y. 8 Y. Launch Portfolio* 1.08% 2.58% 8.70% 19.16% 9.86% 28.40% 48.48% 211.16% Benchmark** 0.53% 1.73% 11.40% 25.82% 4.55% 30.93% 50.83% 218.60% The figures provided relate to previous months or years and past performance is not a reliable indicator as to future performance.

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FUND MANAGER'S COMMENT 30/07/2021 FRAMLINGTONGBP EQUITIES AXA Framlington UK Equity Income Fund R GBP

Objective and investment strategy Delegation of account STATE STREET BANK AND TRUST administration COMPANY The aim of this Fund is to produce higher than average income with Custodian HSBC BANK PLC long-term growth of income and capital. The Manager also intends to *As disclosed in the most recent Annual Report, the ongoing charges achieve a yield of distributable income in excess of 100% of the FTSE All calculation excludes performance fees, but includes management and Share yield at the Fund’s year end on a rolling 3 year basis, and in excess applied services fees. The effective Applied Service Fee is accrued at of 90% on an annual basis. each calculation of the Net Asset Value and included in the ongoing Benchmark charges of each Share Class.

100% FTSE 350 Total Return Gross from 23/02/09 Subscription / Redemption

Risk characteristics Your orders to buy, sell or transfer units in the Fund must be received by the Administrator by 12 noon on any working day, to receive that days Fund price. Please note that if your order is placed by an intermediary or Recommended Investment Time Horizon : This Fund may not be suitable Financial Adviser they may require extra processing time.The Net Asset for investors who plan to withdraw their contribution within five years. Value of this Fund is calculated on a daily basis.

Lower risk Higher risk Minimum initial investment: £1,000 ◄ ► Minimum subsequent investment: £100 Potentially lower reward Potentially higher reward Disclaimers 1 2 3 4 5 6 7 Performance calculations are net of management or distribution fees. Performance are shown as annual performance (365 days). Performance The risk category is calculated using historical performance data calculations are based on the reinvestment dividend. and may not be a reliable indicator of the Fund's future risk profile. Past performance is not a guide to future returns. Figures are on a bid to bid basis, net of fees and expenses, and assume net income is The risk category shown is not guaranteed and may shift over time re-invested in sterling terms. Discrete and cumulative performance returns The lowest category does not mean risk free. are based on published dealing prices. Breakdowns may not sum to 100% Why is this Sub-Fund in this category? due to roundings. The capital of the Fund is not guaranteed. The Fund is invested in Risk Ratios are calculated from gross performances. financial markets and uses techniques and instruments which may be subject to sudden and significant variation, which may result in substantial gains or losses. In the case where the currency of investment is different from the Fund’s reference currency the gains are capable of varying considerably due to Significant risks not taken account by the risk indicator the fluctuations of the exchange rate. Concentration Risk: as this Fund may, from time to time, hold The value of investments and the income from them can go down as well relatively few investments, it may be subject to greater fluctuations in as up and is not guaranteed. This may be due to market fluctuations or value than a fund holding a larger number of investments. changes in exchange rates, or both. The amount returned may not be as great as the amount invested. Past performance is not a guide to future returns. Investments in newer markets, smaller companies or single General characteristics sectors offer the possibility of higher returns but may also involve a higher degree of risk. Legal form Unit Trust The Fund concentrates on the generation of income as a higher priority than capital growth and allocates the Manager’s charge to capital. Whilst Legal country United Kingdom this will increase the distributable income, it may accordingly constrain or Launch date 19/02/09 erode capital growth. Fund currency GBP Shareclass currency GBP The fund is registered for public distribution in UK. Please check the countries of registration with the asset manager, or on the web site Valuation Daily www.axa-im-international.com, where a fund registration map is available. Share type Accumulation / Income ISIN code C / D GB00B523ZL77 / GB00B523ZM84 The tax treatment relating to the holding, acquisition or disposal of shares SEDOL Code C / D B523ZL7 / B523ZM8 or units in the fund depend on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly MEX Code C / D FRBCEI / FRFBCE encouraged to seek advice from its own tax advisors. Ongoing charges 1.60% Financial management fee* 1.5% Depending on the investment strategy used the information contained herein may be more detailed than the information disclosed in the Initial min. subscrib. 1 000 GBP prospectus. Any such information (i) does not constitute a representation Following min. subscrib. 100 GBP or undertaking on the part of the investment manager; (ii) is subjective Management company AXA Investment Managers UK Limited and (iii) may be modified at any time within the limits provided in the fund prospectus.

This document is for informational purposes only and does not constitute, on AXA Investment Managers Paris part, an offer to buy or sell or a solicitation or investment advice. Due to its simplification, this document is partial and the information can be subjective. AXA Investment Managers Paris may but shall not be obligated to update or otherwise revise this document without any prior notice. All information in this document is established on the accounting information or on marketwww.axa-im.co.ukdata basis. All €

FUND MANAGER'S COMMENT 30/07/2021 FRAMLINGTONGBP EQUITIES AXA Framlington UK Equity Income Fund R GBP

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