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.

UK markets proved resilient once more in May; the FTSE All Share* returned 1.26% against a backdrop of further weakening in global market sentiment on continued concerns of high inflation and tighter central bank policy. Disparity within the UK continued; the energy-heavy FTSE 100 added a further 1.1%, whilst the FTSE 250 declined 1.1%. Year-to-date the large-cap index has now outperformed its mid-cap counterpart by 16.8%. During the month, UK flash PMIs were weaker than expected, driven by weaker services and manufacturing data falling to levels not seen since February 2021 following the height of Covid lockdowns. 10-year UK government bond yields ended the month 20bps higher at 2.1%. Some relief came to cyclicals in the latter parts of the month, with a combination of strong UK wage data, a retail sales print (excluding fuel) that unexpectedly rose despite weak consumer sentiment, and the announcement of a £15bn fiscal stimulus package to be funded by a windfall tax on energy companies. 

The fund registered a strong relative outperformance, adding 148bps through stock selection. The effects from sector allocation versus benchmark were neutral for the month. From a style perspective, the pre-Ukraine trends of value and dividend-yield leadership resumed. High beta names rebounded from the lows early-month to finish strongly, whilst the performance of momentum stocks was weak throughout May. Whilst this factor backdrop was supportive to the fund’s performance, 85% of relative return came through stock specific drivers. 

Barclays was the fund’s top performer, adding 40bps. Banks performed well during May, playing catch-up to rising bond yields, having taken a pause following Russia’s invasion of Ukraine. Barclays outperformed its peers as it commenced its £1bn share buyback programme. The group had previously suffered relative share price weakness back in March following a £450m loss for mistakenly issuing more securities for sale than it had registered with the SEC in the US. 

The energy sector finished May as the top performer in the FTSE, despite news at the end of the month that profits would be subject to a windfall tax.  BP and Shell both issued strong Q1 trading updates. In the case of BP, this was despite a $25bn impairment following the decision to exit Rosneft. The underweight to Shell was the fund’s largest detractor in the month (-38bps), marginally offset by the overweight in BP (25bps). Euromoney was the fund’s second-best contributor adding 27bps, after reporting half year results that were ahead of consensus. Fastmarkets and Financial & Professional Services subscriptions continued to grow strongly, whilst Investment Research has stabilised. A return of in-person events will be supportive to the group as we enter H2 and the company expects to be ahead of the Board’s full year expectations in 2022.  Vodafone added 25bps, reporting full year results that were ahead on a number of key metrics, and providing forward guidance that was not as negative as some had feared. The shares were further boosted by the emergence of a new shareholder ‘e&’ that announced a near 10% stake. 3i Group detracted 21bps, pulled lower on a negative read-across from profit warnings at Walmart and Target to its stake in discount retailer Action. The management team moved quickly to rebut any negative comparisons, messaging that Action is trading well ahead of budget year-to-date and the company has seen recent trading deliver strong like-for-likes.  Consumer names WPP and ITV detracted 31bps and 16bps respectively, again taken lower on a negative read-across from the US with Snapchat’s advertising revenues declining. 

*Total return adjusted for 12pm NAV
 

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.