ROYAL LONDON EQUITIES
Fund Manager Commentary – September 2020
For professional clients only, not suitable for retail investors
CONTENTS
Contents RLAM EQUITY PERFORMANCE 3 ROYAL LONDON UK EQUITY INCOME FUND 4 ROYAL LONDON UK DIVIDEND GROWTH FUND 5 ROYAL LONDON UK MID CAP GROWTH FUND 6 ROYAL LONDON UK OPPORTUNITIES FUND 7 ROYAL LONDON UK SMALLER COMPANIES FUND 8 ROYAL LONDON GLOBAL EQUITY INCOME FUND 9
FUND MANAGER COMMENTARY – SEPTEMBER 2020 2 │ PAGE
RLAM EQUITY PERFORMANCE
RLAM Equity Perfor mance
Fund Performance 1 month (%) Rolling 12 months (%) RL UK Equity Income M Inc -2.06 -19.86 IA UK Equity Income Sector -2.41 -18.16 FTSE All Share Index -1.69 -16.59
RL UK Dividend Growth Fund M Acc -1.22 -9.56 IA UK All Companies Sector -1.84 -14.25 FTSE All Share Index -1.69 -16.59
RL UK Mid Cap Growth Fund M Acc -2.71 -9.55 IA UK All Companies Sector -1.84 -14.25 FTSE 250 ex-IT Index -3.17 -15.29
RL UK Opportunities Fund M Acc -1.18 -13.19 IA UK All Companies Sector -1.84 -14.25 FTSE All Share Index -1.69 -16.59
RL UK Smaller Companies Fund M Acc -2.36 1.79 IA UK Smaller Companies Sector -1.47 0.18 FTSE Small Cap ex-IT Index -3.26 -12.69 Past performance is not necessarily a reliable indicator of future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Source: RLAM and FE, correct as of 30 September 2020. Returns quoted are net of fees.
FUND MANAGER COMMENTARY – SEPTEMBER 2020 3 │ PAGE
ROYAL LONDON UK EQUITY INCOME FUND
Royal London UK Equi ty Income fund
Portfolio Commentary
During September, the fund was behind the FTSE All Share index and competitor funds. Positive contributors to performance this month included IG Group, 3i Group and ITV. IG Group issued an encouraging first quarter update, as it continues to trade strongly and to grow its customer base organically. Detractors included WH Smith, Essentra and Signature Aviation. Essentra gave up ground following an equity raise to fund an acquisition, which we thought was reasonably priced and fitted well with the company’s stated strategy and existing business footprint. We participated in three fund raisings over the month where the fund is already a holder: Saga, Essentra and Diploma. Diploma issued shares to part pay for a US acquisition of a specialist low voltage cable distributor at a sensible price and there is a good strategic fit. The shares responded positively when the deal was announced. Saga announced a refinancing that will see its founder take a significant holding in the recapitalised business and become chairman. We would expect to see a broad array of further fund raising across the UK market over the next few months.
Investment Outlook
The economic recovery, which had been slowing building during the summer, may be jeopardised by the recently announced lockdown measures and rising unemployment looks likely. However, more encouragingly, we have recently started to see a range of companies reinstating their dividends, including a number held by this fund. We believe companies are now much more on the front foot and planning for the future. We will continue to target companies that have good medium- and longer-term dividend-paying capacity. We will do this without chasing dividend in the short term to avoid risking too narrow a portfolio, instead retaining a breadth and depth of industry exposure. We are very much sticking to our investment process and using it to guide us through the crisis.
Martin Cholwill
Head of UK Income Equities
FUND MANAGER COMMENTARY – SEPTEMBER 2020 4 │ PAGE
ROYAL LONDON UK DIVIDEND GROWTH FUND
Royal London UK Di vidend Growth fund
Portfolio Commentary
The fund performed better than the benchmark index and also its peer group during September, returning -1.22% and ranking in the 31st percentile. Performance was driven by three of the fund’s largest holdings: Fevertree, Hikma and Ashtead. Fevertree, the maker of upmarket soft drinks, released a trading statement which showed that while demand for its products was weak in pubs and bars, that weakness was being compensated for to some extent by very strong demand in shops. The company also demonstrated good progress in its US expansion, a key area for future growth. Equipment rental company Ashtead also reported reassuring trading and the pharmaceutical manufacturer Hikma was boosted by a court ruling in the US that will allow it to launch a significant new product to market. Trading activity was relatively limited in the month. The fund added to existing holdings in Sabre Insurance, Fevertree, Barclays and the food manufacturing companies Bakkavor and Cranswick.
Investment Outlook
Equity markets remain volatile as sentiment ebbs and flows about the trajectory of the Covid-19 impacts, and also of potential consequences of negotiations around Brexit. As consistently stated, we look to invest in a range of companies that are in control of their own fates, irrespective of market conditions. The Covid-19 shock is proving a stern test of this process, and the resilience of those companies, but we continue to believe that the approach is serving investors well. As well as looking for durable businesses, a willingness to look through short-term extremes of sentiment and buy stocks when they are out of favour, or take profits when sentiment becomes exuberant should drive longer-term performance.
Richard Marwood Niko De Walden
Senior Fund Manager Fund Manager
FUND MANAGER COMMENTARY – SEPTEMBER 2020 5 │ PAGE
ROYAL LONDON UK MID CAP GROWTH FUND
Royal London UK Mid C ap Gr owth F und
Portfolio Commentary
Equity markets gave up some of their recent gains in September, as an emerging second wave of Covid-19 cases triggered restrictions on activity across Western Europe. The fund returned -2.7% during the month, ahead of the benchmark (the FTSE 250 ex-IT index) return of -3.2%, but behind the peer group (IA UK All Companies) median return of -1.8%. Unusually, the fund’s outperformance relative to the benchmark was a result of sector allocation, largely due to the overweight allocation to healthcare and the underweight allocation to financials; stock selection was a modest negative contributor. Genus, the global leader in pork and beef genetics, was the top contributor during September. The group announced record results, supported by sustained protein demand across Europe and the US during lockdowns, and accelerating growth in China as the pork production industry began reinvesting following the effects of African swine fever. JD Sports also generated strong returns after a positive trading update; demand for sportswear and trainers significantly outperformed most retail categories through the summer months. Holdings exposed to the travel and leisure markets, such as SSP Group and WH Smith, were among the most significant detractors during September, following declining passenger numbers as travel restrictions or quarantine measures were re-imposed around Western Europe and the US. Corporate mergers and acquisitions were a feature of the month, with US groups bidding for William Hill and a Canadian peer approaching G4S, as well as an increasing number of outbound acquisitions by UK companies. The fund supported equity raises by Diploma and Essentra during September, both of which were acquiring private US peers. This return of corporate activity demonstrates the degree to which corporate confidence has returned since April, as well as a subtle change in sentiment by owners of private companies who have been more willing, when compared with before the disruption, to consider offers for their companies. In the coming months, we expect well-capitalised public companies to deploy their balance sheets and consolidate their markets from a position of strength.
Investment Outlook
While news headlines have focused on Covid-related disruption, macroeconomic data releases have recovered and suggest that - other than in directly affected sectors (such as travel and leisure) – demand has meaningfully recovered across most developed economies. Forward-looking indicators suggest there should be a sustained re-stocking period in industrial supply chains as housing and automotive end demand pull through. Many portfolio companies saw earnings upgrades through the third quarter into September, as overly pessimistic forecasts set in April and May have been partially or fully reversed. In the near term, we expect a period of better economic activity and synchronised growth across the major markets. We focus our efforts on investing in cash-generative small- and medium-sized companies, with strong balance sheets, structural earnings growth opportunities and valuation optionality.
Henry Lowson
Head of UK Alpha Equities
FUND MANAGER COMMENTARY – SEPTEMBER 2020 6 │ PAGE
ROYAL LONDON UK OPPORTUNITIES FUND
Royal London UK Opportuni ties Fund
Portfolio Commentary
September saw weakness in financial markets as investors became increasingly concerned about the prospects of a second wave of Covid-19 and the implications that would have for economic recovery globally. In the UK, further uncertainty has been created by the ongoing Brexit negotiations and the necessity for a speedy conclusion to allow a trade deal to be in place by the start of next year. Some familiar trends played out with oil & gas stock prices remaining extremely weak, and travel companies struggling. The fund returned -1.18% over the month, which compares to -1.69% for the FTSE All-Share Index and places it in the 30th percentile. The best performing stocks included Melrose, the industrial business which acquired GKN in 2019. Shares in the stock have been incredibly volatile since March and it was pleasing to note its interim results were ahead of expectations. The stock responded by jumping 20%. JD Sports increased 14% over the month and Ashtead, the fund’s largest position, added 10%. Other stocks worthy of mention included DS Smith, the producer of cardboard and paper, and Fevertree, the soft drinks company. The poorest performing share was SSP, the provider of food and beverages in airports around the world where volumes have collapsed. WH Smith had a disappointing month, dropping 19% as travel remains extremely difficult for the majority of the population. With regard to activity, we were again active in Melrose, topping up its position on weak days in the market. We added to our positions in the housebuilders Bellway and Berkeley Group, and also increased the position in Synthomer following a positive meeting with management. We took some profits in the retailers JD Sports and B&M, and reduced our position size in DCC. Overall, the portfolio is biased towards corporates that operate in attractive growth markets and possess sound business models with experienced management teams that should be able to deliver attractive returns.
Investment Outlook
Equity markets remain volatile as sentiment ebbs and flows around the trajectory of the Covid-19 impacts, and also of potential consequences of negotiations around Brexit. The economic recovery, which had been slowing building during the summer, may be jeopardised by the recently announced lockdown measures and rising unemployment looks likely. In addition, the extent to which individuals will be able to decide their own risk appetite for what activities they choose to do going forward is unclear. Virtually no industry will ultimately be immune from the economic and political impact of the coronavirus, which is likely to cast a shadow over the global economy for a significant period of time.
Craig Yeaman
Senior Fund Manager
FUND MANAGER COMMENTARY – SEPTEMBER 2020 7 │ PAGE
ROYAL LONDON UK SMALLER COMPANIES FUND
Royal London UK Smaller C ompanies Fund
Portfolio Commentary
Equity markets gave up some of their recent gains in September, as an emerging second wave of Covid-19 cases triggered restrictions on activity across Western Europe. The fund returned -2.4% during the month, ahead of the benchmark (the FTSE Small Cap ex-IT index) return of -3.3%, but behind the peer group median of -1.5%. Unusually, the fund’s outperformance relative to the benchmark was a result of sector allocation, largely due to the overweight allocations to healthcare and consumer goods sectors, as well as the underweight allocation to financials; stock selection was a negative contributor. Ergomed, the pharmaceutical service group, was the single largest contributor during September. Its interim results detailed +18% organic sales growth despite Covid disruptions, as its specialist covigilence business continued to reap the rewards of its long-term contracts with growing customers, as well as a series of new customer wins. YouGov, the market research and data analytics firm, and Serica Energy, the North Sea gas producer, were among the largest detractors during the month. YouGov’s share price had seen a substantial rally during August and, along with the wider technology sector, gave up some of those gains in September on little newsflow. Serica announced interim results with lower production than had been expected, and combined with declining natural gas prices, this led to a first half loss. However, with production fully restored and a substantially net cash balance sheet, we are comfortable that this was a temporary setback. Corporate mergers and acquisitions were a feature of the month, with US groups bidding for William Hill and a Canadian peer approaching G4S, as well as an increasing number of outbound acquisitions by UK companies. The fund supported equity raises by Diploma and Essentra during September, both of which were acquiring private US peers. This return of corporate activity demonstrates the degree to which corporate confidence has returned since April, as well as a subtle change in sentiment by owners of private companies who have been more willing, when compared with before the disruption, to consider offers for their companies. In the coming months, we expect well-capitalised public companies to deploy their balance sheets and consolidate their markets from a position of strength.
Investment Outlook
While news headlines have focussed on Covid-related disruption, macroeconomic data releases have recovered and suggest that - other than in directly affected sectors (such as travel and leisure) – demand has meaningfully recovered across most developed economies. Forward-looking indicators suggest there should be a sustained re-stocking period in industrial supply chains as housing and automotive end demand pull through. Many portfolio companies saw earnings upgrades through the third quarter into September, as overly pessimistic forecasts set in April and May have been partially or fully reversed. In the near term, we expect a period of better economic activity and synchronised growth across the major markets. We focus our efforts on investing in cash-generative smaller companies with strong balance sheets, structural earnings growth opportunities and valuation optionality.
Henry Burrell Henry Lowson Fund Manager Head of UK Alpha Equities
FUND MANAGER COMMENTARY – SEPTEMBER 2020 8 │ PAGE
ROYAL LONDON GLOBAL EQUITY INCOME FUND
Royal London Gl obal Equity Income F und
Portfolio commentary
Several of the fund’s consumer discretionary stocks delivered strong performances during the month, namely Adidas, Bandai Namco and Fuyao Glass. Fuyao Glass has enjoyed a double tailwind recently, with both cyclical recovery in auto demand surprising to the upside, particularly in its native China, and also a potential long-term structural growth driver emerging as demand for complete glass roofs on cars is starting to gain momentum in Asia. Energy stocks were particularly weak during the month, driven by continued flows into ESG funds from more typical holders, such as income funds. We took this opportunity to reduce the fund’s underweight exposure to energy stocks by adding to Shell and Suncor. We also took some capital from some of the stronger performing stocks in the portfolio: Church and Dwight, Home Depot, Adidas and Accenture. We recycled the proceeds into JP Morgan, Intermediate Capital and Cisco; holdings which are currently out of favour but whose long-term wealth creation and cash generation prospects look undervalued by the market.
Investment outlook
Markets appear, more and more, to be pricing in low discount rates forever, and while we see no catalyst for this to change, quality growth stocks within the fund remain vulnerable should the economic backdrop improve due to their high valuations. As a result, we feel a balanced approach, holding a diverse range of companies from different sectors, regions and stages of their life cycle, is the correct one and can deliver consistent outperformance over time, in a range of macro scenarios.
Niko De Walden
Fund Manager
FUND MANAGER COMMENTARY – SEPTEMBER 2020 9 │ PAGE
ROYAL LONDON GLOBAL EQUITY INCOME FUND
IMPORTANT INFORMATION For professional clients only, not suitable for retail investors. The views expressed are the author’s own and do not constitute investment advice. This document is a financial promotion. It does not provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. For more information on the fund or the risks of investing, please refer to the fund factsheet, Prospectus or Key Investor Information Document (KIID), available via the Fund Information page on www.rlam.co.uk. Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. This does not constitute an investment recommendation. For information purposes only, methodology available on request. Information derived from sources other than Royal London Asset Management is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. All rights in the FTSE All Stocks Gilt Index, FTSE Over 15 Year Gilts Index, FTSE A Index Linked Over 5 Years Gilt Index and FTSE A Maturities Gilt Index (the “Index”) vest in FTSE International Limited (“FTSE”). All rights in the FTSE 350, FTSE All Share, FTSE 100, FTSE 250, FTSE 350 Higher Yield and FTSE Small Cap (the “Index”) vest in FTSE International Limited (“FTSE”). “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence. The Royal London Funds (the "funds") has been developed solely by Royal London Asset Management. The Index is calculated by FTSE or its agent. FTSE and its licensors are not connected to and do not sponsor, advise, recommend, endorse or promote the fund and do not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the fund. FTSE makes no claim, prediction, warranty or representation either as to the results to be obtained from the Funds or the suitability of the Index for the purpose to which it is being put by Royal London Asset Management. All confidential information relating to any Royal London Group company must be treated by you in the strictest confidence. It may only be used for the purposes of assessing the proposal to engage Royal London Asset Management Limited (RLAM). Confidential information should not be disclosed to any third party and should only be disclosed to those of your employees and professional advisers who are required to see such information for the purpose set out above. You should ensure that these persons are made aware of the confidential nature of such information and treat it accordingly. You agree to return and/ or destroy all confidential information on receipt of our written request to do so. Issued by Royal London Asset Management Limited, Firm Registration Number: 141665, registered in England and Wales number 2244297; Royal London Unit Trust Managers Limited, Firm Registration Number: 144037, registered in England and Wales number 2372439; RLUM Limited, Firm Registration Number: 144032, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number 364259. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number 99064. Registered Office: 55 Gracechurch Street, London, EC3V 0RL. The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Royal London Mutual Insurance Society Limited is on the Financial Services Register, registration number 117672. Registered in England and Wales number 99064. FC RLAM ON 0263.
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