Manager's Monthly Report

The Trust produced a Net Asset Value total return of +2.1% during the month and a price total return of +3.2%, compared to a return of +3.0% for the FTSE All-Share Index (TR).

An oft-cited example of the efficiency of markets is the way they respond to statements by central bankers. Investors, caught up in the enthral of the Sino-US trade war, had assumed that the US economy was weakening and interest rate cuts would follow. The inverted yield curve was a reflection of this view. On 18th September the Federal Reserve did indeed cut interest rates but signalled a less negative medium-term prognosis. As investors moved to reflect this view treasury yields rose and investors rotated out of quality and into more speculative value investments. In such an environment your more defensive, quality-orientated trust lagged the market.

September also saw sterling fall to below USD 1.2 for the first time since early 2017. As sentiment around Brexit has fluctuated, the strength of the UK currency has been an effective gauge of pessimism, as have the valuations of many UK domestic stocks. In some cases these have moved to levels that we believe significantly under-price the long-term value of the underlying business.

One such stock was Lloyds Bank. Following reduced expectations for margins and further provisioning for PPI claims, this domestic banking franchise was being priced at a material discount to book value. Although the current political backdrop creates uncertainty, we believe that in the long term this discount is unwarranted. As such, we have added to our holding in recent weeks alongside a small group of similarly cheap UK stocks. While such mispricing opportunities persist, there are opportunities for active managers to deliver excess returns.


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