Manager's Monthly Report

The Trust produced a Net Asset Value total return of +3.3% during the month and a price total return of +3.9%, compared to a return of +2.0% for the FTSE All-Share Index (TR).

Investors could be forgiven for being enticed by a FTSE All-Share dividend yield of over 4% with ten-year gilt yields at 0.5% and cash yielding close to zero. However, the headline UK equity market yield disguises an unusually polarised index. Many mature companies with leaner growth prospects and stretched payout ratios have seen their yields increase to unsustainable levels. Meanwhile, companies with attractive dividend growth profiles and robust cover have seen their share prices rise, consequently shrinking their yields. As investors have become increasingly focused on this latter group of stocks, the resulting share prices rises have materially increased the level of valuation risk. We have looked to cut exposures to some of these holdings, acknowledging that the fragility of the current rally, which in part at least, derives from ample credit and low interest rates.

One such example has been Sage Group, which was one of the first equities bought for the portfolio following Troy’s appointment as manager in 2009. The shares had surged in 2019, recovering from a management-induced wobble last year, and by mid-July the trailing dividend yield had compressed to 2%. However, the valuation (26x prospective earnings) fails to reflect our concerns that Sage may be falling behind its accounting software peers in moving their business into the cloud. We do not doubt the defensive nature of their recurring revenues but a valuation this high must be justified by growth. Following our reduction, Sage’s shares closed the month down -10% after announcing worse than expected Q3 revenues.


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