August, after an initial rally, finished with very weak equity performance, after the delusions over the possibility of peak yields and inflation were demolished by Fed Chair Jerome Powell’s hawkish Jackson Hole speech. The speech focussed upon the need to keep restrictive policy for a longer period so as to ensure that inflation returns to target levels of 2%; this led to interest rate expectations rising for the short-term and a fading of the view that US rates might actually start to fall next year. US 10-year yields rose by 54 basis points to 3.2% whilst German yields rose by an even greater 72 basis points to 1.54%, not least with expectations growing for a larger 75 basis point ECB rate rise in September. In Europe, inflation was again stronger at 9.1% for the flash reading. Dutch TTF natural gas futures rose by a further 25% in August and German baseload one-year forward power prices increased by 59% to €575 per MWh, as compared to a price of €40 at the end of 2019.

This was exacerbated by news of Gazprom cutting supply again due to unexpected maintenance on Nord Stream 1. The possibility of winter period gas rationing was thankfully reduced by news the European Union is set to meet its 80% gas storage filling goal two months ahead of target. The energy crisis has been further exacerbated by the low output from the French nuclear fleet and the effects of drought on both coal and hydro.

The fund gently outperformed in August, predominantly driven by allocation effects. Strong stock picking did come through in Deutsche Telekom, AXA and TotalEnergies amongst others, but was offset by a very poor performance from Sanofi. The latter was hit hard by concerns over the size of potential litigation costs coming from the drug Zantac, which might be considered carcinogenic due to possibly containing NDMA impurities. Sanofi distributed the heartburn drug in the US between 2017 and 2019, the drug was initially owned and distributed since the 1980s by Boehringer Ingelheim with which Sanofi undertook asset swaps in 2017. The share price reaction has been swift in likely pricing in a worst-case scenario; however, this is likely to remain a significant shadow for the stock until well into 2023 when the main cases take place.

Elsewhere, results from CRH reassured in terms of the group’s pricing power and the fiscal underpinning to the US outlook in regard to infrastructure investment. We slightly added to the banks sector weighting through the purchase of a small position in Bank of Ireland, where the benefits to come from rising rates look significantly underestimated versus the size of fears over the potential for slightly higher provisioning in a more recessionary climate.
 

Data shown net of fees, net income reinvested. Please note that fund performance is shown against the MSCI Europe ex UK NR 12pm adjusted. Data for the period 5 November 2001 to 31 December 2012 is shown against the FTSE Eurofirst 300 ex UK TR Index. Performance of other share classes may vary and is available on request. Where shown, monthly returns table shows compounded discrete monthly performance. During the period  5 November 2001 to 7 May 2003 the performance record is based on the pre-existing share class that had a higher management fee.

Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The Funds investment include shares in small-cap companies and these tend to be traded less frequently and in lower volumes than larger companies making them potentially less liquid and more volatile.
 

Amongst other characteristics, the Fund promotes environmental and social characteristics and invests in companies that apply good corporate governance.  JOHCM Funds (Ireland) Limited, the Fund’s manager, has therefore categorised the Fund as meeting the provisions set out in Article 8 of EU Regulation 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”).  

J O Hambro Capital Management Limited (“Investment Manager”) seeks to avoid investing in companies which employ practices that contribute to significant environmental and social harms. The Investment Manager focuses on the incremental direction of travel that a company is on and considers whether a company is contributing to or undermining the UN Sustainable Development Goals when assessing its environmental management and social impact. In particular, the Fund seeks to avoid companies with poor performance in relation to carbon emissions, diversity, wages and treatment of employees. 

In addition to considering Environmental Social and Governance (“ESG”) key performance indicators, the Fund applies exclusions to support the avoidance of harms. In order to support the reduction of adverse environmental impacts of the Fund’s portfolio, the Investment Manager excludes: 

1. any company which derives greater than 5% revenue from thermal coal mining; 
2. any company which derives greater than 5% revenue from oil sands; 
3. any company which derives greater than 5% revenue from arctic drilling; 
4. any company which derives greater than 5% revenue from hydraulic fracturing; and 
5. any company which derives greater than 35% revenue from coal-based power generation. 

These selection criteria may not be disapplied or overridden. 

In order to measure and monitor the environmental characteristics of the Fund, the Investment Manager will review the carbon footprint of the portfolio and environmental data published by its investee companies.  For the social characteristics of the Fund, the Investment Manager will review whether investee companies have implemented appropriate policies and structures to support sustainable business practices.   

Although the Fund may invest in economic activities that contribute to an environmental objective within the meaning of the EU’s Sustainable Finance Disclosure Regulation (SFDR), the Investment Manager is not currently in a position to assess the proportion, as a percentage of the Fund’s portfolio, of investments in environmentally sustainable activities which are aligned to the EU’s Taxonomy Regulation (TR) (Regulation (EU) 2020/852) and amending Regulation (EU) 2019/2088.

This is due to a lack of reliable, timely and verifiable data for the Investment Manager to make a full and accurate assessment of the investments of the Fund against the TR’s Technical Screening Criteria in respect of climate change mitigation and climate change adaptation. 

As a result, the Investment Manager is unable to determine whether the underlying investments in the Fund contribute to climate change mitigation and/or climate change adaptation, or whether the Fund has investments in economic activities that qualify as environmentally sustainable pursuant to the TR. As such, it has been determined that, 0% of the Fund’s investments are in economic activities that qualify as environmentally sustainable under the TR.

The Investment Manager is keeping this situation under review and will revisit the TR disclosure requirements once sufficient data is available.
 

Investee companies must follow good governance practices. This requires investee companies to adhere to minimum standards in various areas including sound management structures, employee relations, remuneration of staff and tax compliance. The Investment Manager is a signatory to the UK Stewardship Code 2012, is requesting to be a signatory to the UK Stewardship Code 2020 (together the “Code”) and is a signatory to the UN Principles for Responsible Investment (the “UNPRI”). As a signatory to the Code and the UNPRI, the good governance practices of investee companies are assessed by the Investment Manager prior to making an investment and periodically thereafter. 

The Fund uses the MSCI Europe ex UK NR Index for performance fee calculation purposes only and it is not, nor is it intended to be, aligned and/or consistent with the environmental and social characteristics promoted by the Fund.