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

Investment background UK-US 10 yr government bond spread Equity markets continued to recover from their March lows in 4 the UK and the US, whilst European stock markets struggled somewhat in the face of new political crises in both Italy and 3 Spain and a continued moderation in various PMI data. Emerging markets continued their recent struggles due to continued US dollar strength and various headline idiosyncratic issues recently 2 affecting Argentina, Brazil and Turkey, in particular. Further headline news regarding trade wars and the on-off US summit 1 with North Korea did not help the general macro environment. Economic data in the UK generally remained subdued, particularly 0 the manufacturing PMI which continued to decline in April. The service sector recovered marginally from March’s weak showing, -1 and the construction sector bounced back particularly strongly, although the recovery was not broad based and was more focused on new housing, a part of the market that continues to see strong -2 government support. The much-discussed real wage situation May 89 Feb 95 Nov 00 Aug 06 May 12 Feb 18 continued to improve, however, and remains one of the key pieces Source: Bloomberg as at June 2018. of the confidence malaise currently being suffered in the UK. Data released in May showed that nominal average weekly earnings Strategy update (ex-bonuses) in the three months to the end of March grew by 2.9%, with the three-month average CPI over that period being The Fund performed broadly in line (+3bps) with its benchmark, 2.7%. More interestingly, wage settlements in the month of March the FTSE All-Share Total Return index (adjusted) in what was a were 3.0% up year-on-year, whilst CPI inflation data for April fell tougher month for outperformance given declining bond yields to 2.4%. That is a material widening of the gap between wages and weakening sterling. Declining bond yields are not immediately and prices and represents the strongest real wage position in the supportive to this Fund, which remains underweight large-cap UK for a number of years. defensives. As an example the Fund’s underweight position in British American Tobacco cost c. 23bps over the month. Consumer confidence recovered slightly, according to the monthly Interestingly, however, sector allocation effects were broadly GFK survey, although remains overall in negative territory for the positive for the month, with the relatively neutral positions in 28th month in a row. The scores for personal finances, particularly both oil & gas and basic materials helping defend the Fund from for the year ahead, continued to improve somewhat, although a further sharp upward move from those sectors and allowing the thoughts over the general economic situation of the country overweight positions in both industrials and consumer services to remained downbeat (as noted in the GFK press release). Retail add value. sales data therefore remained relatively subdued in April, rising by 0.1% (three-month on three-month), although bouncing back May was an important month for the Fund, with a number of 1.6% from a weak, weather-affected March. It will be interesting the portfolio’s largest active positions being March year-ends to see how things develop from here, given the continued labour and therefore reporting full-year results. Electrocomponents, market strength and recent real wage improvements, although QinetiQ and 3i Group, collectively c. 11% of the Fund, all the recent rise in oil prices may have a partially dampening effect. reported excellent full-year numbers. These resulted in earnings or NAV upgrades in all cases and saw their share prices rise UK interest rates were kept on hold in May – as expected after the immediately following the earnings announcements. weaker Q1 GDP figures – as they also were in the United States. General economic conditions in the US continue to outperform The performance from Electrocomponents was particularly the UK and helped drive a wide divergence in bond yields and noteworthy, given a set of very strong results across the board, c. currency movements over the month. UK 10-year gilt yields fell 7-10% earnings upgrades for the year ahead and the first bolt-on by 19bps, or 13%, over the month to 1.23% (moving more in line acquisition from this management team (and from this company with eurozone yields) whilst 10-year US Treasury yields fell by just for a generation). 9bps, or 3.4%, to 2.86%. The UK-US 10-year government bond Having raised expectations for the full-year results at both the Q3 spread is plumbing new lows and now stands at a historic -163bps, and Q4 trading statements, driven by continuing strong revenue a reflection of many things of course but extremely noteworthy growth across all regions, 2018’s results were delivered in line with nonetheless, with sterling/dollar closing the month back at $1.33, these higher expectations. down 3.4% for the month and well below the long-run average since 1970 of closer to $1.75. The positive news for the future, however, was the strength in gross margins, which grew year-on-year and exited the period at the year’s highs. This was caused by better pricing discipline, a positive mix towards higher margin own label products and better supplier rebate management. This bodes well for future gross margin development, particularly given the stronger growth (than group average) of the higher margin RS Pro own label products

within the mix. The acquisition of IESA for £88m adds a high Under the Bonnet – June 2018 growth, high margin and differentiated corporate maintenance

www.johcm.com 2176004. Registered address: Ground Floor, Ryder Court,14Ryder Street, LondonSW1Y 6QB. Management Ltd. J O Hambro® isaregistered trademark Holdings Broom Ltd. Registered ofBarnham in and Wales under No: further distribution of ICB is permitted FTSE’s without express written consent. JOHCM® is a registered trademark of J O Hambro Capital licensorsaccept orits any International FTSE liabilityLimited under licence. Neither used by FTSE for errors oromissions in the ICV. No areit ® is a owned trademarkby and vest licensors. “FTSE” and/or its in FTSE of the Stock Exchange Group companies and is in rights all and (“ICB”) Benchmark Classification 2017.Industry FTSE The © (“FTSE”) Limited International FTSE request. on available share classA in GBP, net income reinvested. All-Share FTSE TR Index. Benchmark: Performance ofothershare classesmay vary and is making less liquid them potentially and more volatile. International. Source:Note for JOHCM/Bloomberg/FTSE return history: NAV of investmentinclude shares companies and tend tobetraded in these small-cap less frequently and in lower volumes than larger companies expression ofopinion is for information purposes only and is given on the understanding isnotarecommendation.that it The Funds them may go as up down and as well you may not get back your original investment. The information contained herein including any Financial Conduct Authority. Pastperformance isno guaranteeof future performance. Thevalue of investmentsand the incomefrom Source: JOHCM/Bloomberg unless otherwise stated.Issued by J O Hambro Capital Management Limited authorised and regulated by the 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. Source:NAV JOHCM/Bloomberg/FTSE of share classA in GBP, net income reinvested, netoffees, as31 May 2018. Inception Past performanceisnoguaranteeoffutureperformance. 5 year discrete performance (%) JOHCM UKDynamicFund net debt 2016 of £679m net cash to an in expected September actions haveand These Genscape. takenfrom thebalance sheet at twoofthekey underperforming information businesses, RMS sold part oftheUSeducation businessand replaced management Xceligent, business loss-making highly another closing whilst EDR the partdisposal of Euromoney, has sold US property business under a completelynewmanagement, this board has sanctioned months, 18 last the just In portfolio. DMGT the within on going is yet another example of the radical rethinking and restructuring return on investment for DMGT - c. 14x its original investment), this premium. Whilst a good deal in itself, (c. 23x earnings and a huge Silverlake Partners as part of a full bid for Zoopla at a c. 30% DMGT into theshares. followedSimon Borrows afurther thiswith c. £32.5m investment continuing strong momentum across theinvested portfolio. CEO the by backed policy, new confident and powerful very a is This an interim dividend of c. 50% of the prior year’s total dividend). a newprogressive dividend policy from this30p base (including better-than-expectedfull-year dividend of c. 30p, accompanied by investmentreturn ofc.30% year-on-year and announced a 3i Group time. (JOHCMforecasts) deliveringpotentially c. 30p of earnings per share in three years’ gain real traction. This offersthe enticing prospectof thecompany business both organically and via bolt-on is acquisitions starting to targetedstrategy underthismanagement team togrow the a having downward effecton group margins navigated. isbeing well The re-pricing Office) Regulations Source (Single issue SSRO specific of the and commentators some by predicted extent defencespending, whilstpressured, hasnotyetfallen to the peak to trough stable to growingdespite earnings. Government the snap UK after general election in June 2017, falling c. 40% January 2018). This business suffered amajorshare pricefall aftera poise which we have previously ‘Under the Bonnet’,commented (see their to recover the shares surprising period in of weakness the lastnine months and about led This flow. cash QinetiQ’s conviction holding. low at less than 0.5x net debt: This ebitda. remains a high Even accounting for the acquisition cost, group leverage remains and looks a sensible bolt-on that offers clearrevenue synergies. repair and operations (MRO) function to thegroup’s business mix Disc Relative return Benchmark JOHCM UKDynamicFund management sold the group’s 30% stake in Zoopla to re te 12monthperformanceto continued its strong continued its run ofresults. Itdelivered agross resultson also both earnings beat expectations and

31.05.2018 3.06 9.66 6.41

31.05.2017 24.5 30.71 4.98 1 31.05.2016 -8.8 -2.2 -6.8 2 6 0

31.05.2015 12.03 placed thedividendunderalittle more perceived pressure. reasonably high and adds a level of gearing which has perhaps and growth optionality, the pricepaid, whilst notoutlandish, is whilst agood deal, in being complementary and offering synergies European fromassets Liberty Global, and a CEO succession. Again, weakerresults, theannouncement of atransactionof tobuy a set Vodafone therefore themargin ofsafety onthedealisquestionable. and offer more diverserevenue streams, but the pricepaid and simple synergies.cost are The assets undoubtedly high quality for example growth from geo-cloning, whilst also offering some investment, and management intensive more from benefit could cash generativeof established, and market-leading shows which whilst previously at – the attraction is in adding a set of whom (including the CEO and COO) used to run these assets getting the better side of thedeal. For ITEmanagement – some 25% marginebitda business) tobe, in seems the short-run at least, Ascential, asalepriceof£300m which, or c.4xsales(forwith a Ascential’s business. exhibitions The Fund also has in a position ITE earnings base.Thisisavery interesting indeed. situation (e.g. RMS) could deliversubstantial value to theexisting remaining meantime, efforts toreinvigorate certainunder-earning assets, recycle at theright capital time or return a portion Inof it. the optionality to management (whom we feel be disciplined) to will accused ofbeing slow moving. givesThe balance sheet powerful indeed and surprisingly rapid for an organisation sometimes of c.£400mposttheZooplaposition sale. Theseare radical moves 3.5 8.23 2 traded poorly announcingafter the proposed acquisition of 31.05.2014 also performedof in a set line poorly to slightly after 15.8 6.34 8.97 8 www.johcm.com

Under the Bonnet – June 2018