Manager's Monthly Report

The Trust produced a Net Asset Value total return of -3.8% during June and a price total return of -1.2%, compared to a return of -2.5% from the FTSE All-Share Index (TR). This was a difficult month for equity markets and none more so than the UK, where the inconclusive general election result achieved the direct opposite of the Prime Minister’s stated aim to secure a clear majority and thus strengthen Britain’s hand in the Brexit negotiations.

Instead, a minority government, supported by the DUP, is entering into the most complex process the UK has undertaken for fifty years. Pedestrian nominal wage growth and currency-induced inflation are conspiring to erode real earnings and sap spending power. With the UK savings ratio falling to an all-time low of 1.7% of disposable income, and consumer credit still rising, the pressure to relax the purse strings on public spending is coming from both sides of the political aisle. Growth in the first quarter of 2017 slowed to just 0.2% - the slowest rate in the G7.

Winners in the stock market are hard to find in the current environment and only twenty share prices in the FTSE 350 index rose by over 5% in the month. By contrast over one hundred share prices fell by over 5% and, as we always say, it was more important to ‘avoid the torpedoes’ than find the winners. This cannot always be achieved.

One of the best-performing holdings in the portfolio in recent years, Provident Financial, hit a bump in the road last month. The transition of its home-collected credit business to a new operating model has faltered, prompting earnings downgrades of -15% this year and -10% in 2018. The share price correction of -20% has, in our view, now discounted this bad news and the growth areas of the business are unaffected. We have added to the holding at current levels.

It is hard to be optimistic about equities at present, but that is a widely-held view – normally a bullish indicator. The portfolio contains holdings in many companies that are able to generate sufficient cash flow to grow their dividends. Although there are plenty of dark clouds currently for investors we remain confident about the income generation potential of the Trust.

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