The objective of the JOHCM UK Dynamic Fund is to achieve long-term capital growth. The Fund will aim to achieve this objective mainly through investments primarily drawn from companies listed on either of the two primary markets of the London Stock Exchange: the main market and AIM. At least 75% of the Fund’s assets will, at all times, be invested in equity securities of companies domiciled or exercising a predominant part of their economic activity in the United Kingdom. On occasion the Fund may utilise this position to invest a proportion of its assets in equities listed on a recognised exchange outside the UK. Investment will be made primarily in equity securities which are readily marketable, but investments will also be made in equity securities of smaller companies which can be more lightly traded. The portfolio is likely to be fairly concentrated with the Fund typically holding equity interests in between 35 and 50 different companies.

The stock market recovery faltered in June after a reacceleration of coronavirus case growth, primarily in the US and to a lesser extent elsewhere. This led to local lockdowns being reintroduced in some of the worst affected areas. The dreaded second wave has therefore become a reality, although, importantly, death rates remain under control and are not particularly rising with case growth as treatment options continue to improve. The market, being very sensitive to case growth and lockdowns, predictably turned lower as the month progressed and the same trends re-asserted themselves in the market: long Covid-19 winners, short Covid-19 losers.

In a month that saw a large number of corporate updates for the Fund, performance again was underwhelming. This was quite surprising given the positive backdrop of economies re-opening, low valuations and some encouraging current trading statements, albeit in the context of tougher lockdown trading and continued earnings declines.

Crest Nicholson provided the largest stock hit (-40bps relative). Disappointing interim results led to a c.20% share price decline. Numbers missed due to low transactional activity during lockdown, part of which we expect to unwind in H2. Forward price and mix assumptions and associated asset write-downs (despite reasonably strong current trading) also disappointed. NAV estimates fell c. 5%-7%, leaving the shares trading at c.0.6x book value.

More positively, Electrocomponents’s full-year results and outlook statement were both better than expected. The company continues to operate effectively and is taking share in its markets despite the downturn. Euromoney’s interim results were also better than expected and, for us, draw a line under a turbulent nine month-period that has seen the shares broadly halve. The company has high recurring revenue streams, interesting digital assets, a strong balance sheet, recovery potential from both the events and asset management divisions and a growth division called Fastmarkets that is materially undervalued within the group.

Whilst the performance outturn for June and for the second quarter was somewhat disappointing, it must be re-emphasised that the outcomes from this portfolio of business transformation investments will be heavily driven by the idiosyncratic effects of longer-term capital allocation and business management decisions rather than the shorter-term earnings effects of Covid-19.

Indeed with the concentration of capital within the portfolio over the last few months, which has seen the effective number of stocks within the portfolio reduce to 31, shorter-term performance against the index may be more volatile. Fund performance may indeed not be defined by the short-term performance of certain external factors, e.g. value or growth, but instead by true underlying business improvements becoming visible to the market. These have their own timeline.

In the meantime, we are engaged at a deeper level than ever with the Fund’s investments, particularly where there are issues that need to be addressed. This engagement is to serve various purposes including furthering our own understanding, helping support tough courses of management action, encouraging more dynamic leadership and, in some cases, starting the process of post-Covid-19 board evolution.

We continue to believe that the current portfolio will recover as the year progresses.

Performance data for the period 16 June 2008 to 23 October 2009 is for Ryder Court UK Dynamic Fund. From 23 October 2009 onwards, the Fund converted to the JOHCM UK Dynamic Fund.

Data shown net of fees, net income reinvested. Please note that all fund performance is shown against the FTSE All-Share TR 12pm adjusted. Performance of other share classes may vary and is available on request. Where shown, monthly returns table shows compounded discrete monthly performance. Performance of other share classes will vary and is available on request. During the period 16 June 2008 to 23 October 2009 the performance record is based on the pre-existing share class that had a higher management fee.

FTSE International Limited (“FTSE”) © FTSE 2017. The Industry Classification Benchmark (“ICB”) and all  rights in it are owned by and vest in FTSE and/or its licensors. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. Neither FTSE, nor its licensors accept any liability for any errors or omissions in the ICB. No further distribution of ICB is permitted without FTSE’s express written consent.

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 annual management charge is deducted from the capital of the Fund. This will increase the income from the Fund but may constrain or erode potential for capital growth. 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.