The Fund aims to achieve long-term capital growth by investing in UK listed companies across the broad market cap range.

The Fund underperformed over the month, capping off a difficult quarter and ultimately leading to a sub-par result for the year as a whole. Given the promising start and coming off a very strong 2020 this is obviously a somewhat disappointing outcome.

The critically important point is, aside from a small one earlier in the year (Abingdon Health) in our honest and considered opinion there have been no permanent impairments. Throughout the Funds history we have always been consistently candid and transparent when we have such had any such hits, so this is not a statement we make lightly. Put another way, what we are implicitly saying is that in the fullness of time and assuming our analysis is correct, we expect to not only fully recover the underperformance of the names that have not worked in the short term but to generate very substantial alpha over and beyond this. This of course is in addition to the plethora of undiscovered growth assets that populate the fund and are themselves very meaningfully mispriced. It is a judgement validated by 88 individual director equity purchases of UKG portfolio assets over the course of the year and a conviction shared by ourselves where we have both made recent, meaningful Fund purchases. With an overall profile significantly cheaper than the market, appreciably stronger balance sheets than the market and yet offering substantially higher earnings growth (and in a market that itself trades a multi-decade discount to developed peers) we believe the case is a very compelling one.

Turning to December specifically and aside from the small cap/AIM market lagging the rally overall, the main culprit was Venture Life. This is a business that executed fantastically during the pandemic but has run into some trading difficulties as this year has progressed. Venture is a manufacturer and distributor of proprietary OTC medications throughout Europe and Asia. This an attractive, structurally growing market, playing into the growing trend of self-medication, shifting hygiene habits post COVID and an aging population. It is a unique business for its size, having not only the scientific expertise to develop and create formulations, but also the regulatory function to bring them to market and the specialist manufacturing capability to capture all of the margin in house and scale as the business grows. 

The company has experienced issues over freight and driver availability, as well as rising input prices as well as some caution amongst some of its retail customer base given uncertainty over Omicron. Because Venture is a vertically integrated business, this has an especially magnified impact on the drop through margin and therefore on short term profitability.

The impact on the shares has been significant, falling to 29p at one stage from north of 90p at their peak earlier this year and 48p at the start of the month. We see this as a pretty dramatic overreaction. At this price the business trades around 2.5x EV/Gross profits and just over 4.5x EV/EBITDA. For context, peers trade in excess of 10x and with considerable M&A transaction recently undertaken in the space at nearer 20x. The very same operational gearing that hit on the way down will be just as potent on the way up. The business has some unique assets in a growing sector and with considerable IP and a valuable customer base. We do not think the share price will languish down here for long. The management have been understandably been buying stock (in fact they have had two bites at the cherry) and we have done exactly the same.
 

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. All performance figures illustrate performance from the first full day that the Fund held investments. During the period 6 November 2001 to 7 May 2003 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 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 invest only in companies that meet minimum sustainability practices. The Investment Manager refers to the ten principles of the UN Global Compact, which promote sustainable and responsible corporate development in order to make globalisation more socially and ecologically focused. They fall into the categories of the protection of human rights, maintenance of appropriate labour standards, promoting environmental responsibility and the prevention of corruption.   

In order to achieve the above, the Fund excludes investment in those companies it considers “non-sustainable”. The issuer of a security is considered “non-sustainable” if it is “non-compliant” with the UN Global Compact. The selection criteria may not be disapplied or overridden by the Investment Manager. We utilise the UN Global Compact assessment of our third-party provider, Sustainalytics. 

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 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.  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.