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.

Turbulence returned to global stock markets in August, as concerns of global growth and hawkish central banks revived. Revised forecasts suggest domestic inflation is set to be higher for longer. 

Consumer cyclical stocks led declines, while energy remained the top performer on elevated gas prices, despite weakening oil prices. Ofgem announced the reset of the energy price cap, set to increase 80% from 1st October, worsening the domestic cost of living outlook. 

Against the backdrop of a stronger Dollar, cyclical declines and further risk to the domestic economy from rising energy costs, the FTSE 250 considerably underperformed the FTSE 100 by -4.1% in August. 

In this macro environment, the fund had a difficult month, underperforming the FTSE All Share by -1.61%. Some of the fund’s cyclical positions were caught up in the macro move without any material idiosyncratic news flow. 

WPP (-50bps) came in with some good H122 numbers, beating consensus expectations (+8.3% Rev growth vs 5.5% Consensus). Despite the robust trading performance, the market took a very dim view of performance on margins and cash, and the European advertising market more generally, de-rating WPP further in the process.

The performance in Centrica (-39bps) was surprising, given yields, gas and power prices continued to rise providing material tailwinds. This is after the company beat and raised expectations for the full year in their H122 results presentation. The company trades on a forward PE of 5x, despite holding net cash on the balance sheet and a pension deficit that has been materially de-risked. We believe Centrica is a strategic asset that will help the UK transition to Net Zero with a unique set of competitive advantages, including two unique physical assets with the optionality to be valued at greater than £1bn each (currently valued at zero by the market). We find the level of pessimism embedded in the share price to be extreme and consequently have used this as an opportunity to increase position size.

Rising yields and fears over the future of London offices and retail led to Land Securities (-29bps) being de-rated 10% to 0.6x book value. It is worth keeping in mind these book values have already been severely written down post-Covid. We believe this broad stroke approach does not take into account the polarisation in office demand between quality modern office spaces and low-grade offices.

Travis Perkins (-25bps) continued to stay out of favour as fears of a deep recession in the UK led to the market de-rating the stock close to its decade low PE, despite next year's earnings having been revised lower by the market. At current prices, we believe the entire merchanting division alone could potentially justify the value of the company, with more than £400m of unrealised freehold property gains and the entire Toolstation business being offered for free.

The share price of GlaxoSmithKline (+2bps) fell 20% in August, over fears of litigation actions relating to Zantac.  At this stage we believe the case to be complex and the financial outcome difficult to predict, given the significant number and diversity of plaintiffs potentially involved, but we believe the market cap decline of -£12.8bn in response to be extreme. Relative impact to fund performance was minimal, as the fund began August with an underweight position, but we have taken the weakness as an opportunity to add to our weighting. 

On a positive note, Pearson (+52bps) shares rallied after delivering a strong set of H122 results, reporting growth ahead of consensus expectations. The main surprise came from the announcement of at least £100mn in incremental cost efficiencies for 2023, resulting in delivering the target of mid-teens margin in 2023, two years ahead of expectation.

Aviva (+35bps) shares had a good month after reporting a strong set of H122 results that beat market expectations and announcing another round of buybacks using excess capital.

BP (+24bps) was a positive, however the fund’s aggregate underweight to the energy sector was an overall detractor through allocation effects. 

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”). 

In looking for investments, J O Hambro Capital Management Limited (“Investment Manager”) seeks to avoid investing in companies which contribute to significant social and/or environmental harms, and thereby fail environmental, social and governance (“ESG”) key performance indicators.  The Investment Manager takes a holistic approach when considering a company’s sustainability characteristics.  In particular, the team looks for the sustainability “mindset” of the organisation, asking how is this business thinking sustainably and how does this lead to more sustainable, forward-looking business decisions.  In order to achieve the above, the Fund applies an exclusion to those companies it considers “non-sustainable”. The Fund will invest no more than 10% of the Fund in companies rated ‘Severe’ by Sustainalytics, and for any such Severe-rated company to be investable it must be categorised as ‘transitioning’ as defined by the Investment Manager’s framework.  The selection criteria may not be disapplied or overridden by the Investment Manager.

The exclusion criteria referred to above will be applied prior to making any investment and the fund’s portfolio will be monitored for any investments which breach these exclusion criteria on a periodic basis. For this purpose, the Investment Manager will rely on data (and the ESG definitions aligned with that data) from a third-party provider, or such other source as the Investment Manager determines. 

In order to measure and monitor the environmental and social characteristics of the Fund, the Investment Manager will review relevant metrics including the carbon footprint of the portfolio, emissions reduction targets, diversity metrics, employee engagement, and whether investee companies have implemented appropriate policies and structures to support sustainable business practices. The Investment Manager will also consider data provided by a third-party data provider, although this will not necessarily directly influence whether a company will be bought or sold by the Fund.

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. It is also important to note that given the geographical focus of the Fund’s strategy, companies within the investment universe might not be under any obligation to provide the data required under EU legislation.

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. JOHCM has met the expected standard of reporting under the UK Stewardship Code in 2021 and has been approved as a signatory. 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 FTSE All Share Total Return 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.