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.

It was a strong end to a strong year for the stock market. The FTSE All share TR index rose by 4.68% in December to close the year up 18.3%. Against this, the fund fared ok, rising by 4.38% over the month, an underperformance of 28bps. This closed a tougher quarter during which the Fund underperformed by 148bps, in part due to the yo-yoing short-term macro debate. Over the year the Fund did well, outperforming its benchmark by 407bps and erasing roughly half of the prior year’s underperformance.

Were it not for the very negative performance of three large and idiosyncratic positions, Convatec, Pearson and QinetiQ, the performance story in the second half would have been much better. Over the year these stocks contributed -321bps of relative performance, with -198bps of that in the final quarter. As we wrote last month, none of these companies had a profit warning and we feel sure that the underperformance will prove transitory.

Our firm conviction in Convatec in particular is reaffirmed after an extremely encouraging meeting with the Chairman and CEO in December during which we re-visited the business transformation case from scratch. We believe the current way of thinking about Convatec as a low growth, low margin company with an ageing product profile ceding market share is wrong. Years of underinvestment in R&D, sales and marketing and overall strategy is being rapidly repaired through the P&L with the results already starting to show. With limited new product launches, a business that was essentially going backwards in revenue, profit, market share and quality is now consistently growing at a rate of 4% plus, despite ongoing Covid-19 headwinds. 

On the positive side, the year was defined by strong M&A activity as a number of the Fund’s larger and more contrarian positions were subject to bids. Morrisons, DMGT and St Modwen made the headlines given our public opposition to the initial low-balled bids and their large positions within the portfolio, but the year should also be remembered for the completion of the bid for Urban & Civic and the bids for Aggreko, Ultra Electronics and Stock Spirits. Two attempted bids for Elementis also failed (albeit one of these bids was in late 2020). The combination of Morrisons, DMGT and St Modwen contributed 490bps of positive relative performance whilst Aggreko, the larger of the others, contributed a further 77bps. 

The Fund’s outperformance in 2021 was not just about the M&A activity though. It was also about the benefit of good strategic decision making from many of our boards. Whilst it was the M&A stocks that topped the relative performance leader board, in absolute terms it was another sub-set of stocks of more unheralded stocks that impressed us most. Man Group and Centrica top that list rising by 72% and 53% respectively. 
 

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, 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 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.