The Fund aims to achieve consistent capital appreciation over the longer term by investing in stocks of primarily UK-listed large and mid-sized companies. Up to 10% of the Fund may be in international stocks. A thematic, top-down process is used to identify stock ideas and then married to a rigorous approach to valuation. Portfolio construction is benchmark-unaware with roughly equally-weighted positions in typically 30-40 stocks reflecting high conviction management.

The investment backdrop evidenced some pockets of inflation emerging in February. Whether inflationary pressures end up being a short or long term phenomenon, the fund is well-placed with an investment process focused on owning companies that have pricing power. Attractively-valued companies which benefit from high gross margins, strong brands, leading platforms and are well positioned in their value chains look set to prosper in the emerging environment. We also look for businesses with inflation-linking within their contract structures, for example, National Grid, SSE and Serco whose returns are linked to inflation. In the last six months we have increased the inflation protection in the Fund and have reduced the average valuation to a forward free cash flow yield of 6.8%, or 14.9x P/E equivalent. The valuation of the fund is now in line with the FTSE All Share Index, whilst offering better growth prospects through selective and high-conviction exposure to companies which we believe will be a more important part of the future.    

During February many companies reported full year results and trading updates. It has been encouraging to see the positive progress made by all the companies in the Fund over the last year and how the thematic tailwinds have accelerated to drive faster growth than before the Covid-19 pandemic. We have also noted a marked and positive change in management behaviour with the emphasis on capital allocation moving to investment and away from financially engineering returns via buybacks. For example, Smith and Nephew announced an increase in its R&D spend by a third last year compared to the average of the last five years and capex spend has doubled between 2018 and 2021. At the time of writing, the importance of investment formed a central part of the UK Budget and tax deductions on capex spend should benefit many of the companies in the Fund. 

Portfolio activity continued the ‘twist’ to reduce valuation risk, select the strongest growth tailwinds and strengthen inflation-linking. We started a new position in the paper and packaging company Mondi, which is well-placed with its large and leading network of paper, cardboard and flexible packaging production facilities. Mondi’s volumes are continuing to see a material step-up thanks to e-commerce driven cardboard box demand, its customers moving from plastic to paper bags and the leading position it has in barrier coating technology, allowing paper solutions to reduce plastic use in consumer and other products. The shares are attractively valued trading on a forward free cash flow yield of 7%. Elsewhere we sold our holding in Compass Group to zero after a strong recovery in the share price and the stock reaching a valuation which was factoring more than a full recovery in pre-2020 staffing volumes in offices. We were also concerned about the group’s ability to pass on price increases and the high component of wage costs within its margin structure. 

During the month the Fund returned 1.37% compared to a 2.06% return for the FTSE All-Share Index (12pm adjusted). In absolute terms the best performers were Whitbread, Antofagasta, SSP Group and WPP as the market continued to rotate towards the beneficiaries of economies opening up. Performance was held back by Barrick Gold which suffered from a declining gold price, SSE where concerns around the prices being bid for offshore wind farm licenses in the North Sea weighed on the stock and GlaxoSmithKline where the group announced R&D going up by double-digits, which in the short term will reduce margins.  

Data shown net of fees, net income reinvested. Performance of other share classes may vary and is available on request. Please note that all fund performance is shown against the FTSE All-Share TR Index. Where shown, monthly returns table shows compounded discrete monthly performance.

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.

J O Hambro Capital Management Ltd is licensed by FTSE to redistribute the FTSE All-Share Total Return Index. All rights in and to the Index and trade mark vest in FTSE and/or its licensors (including the Financial Times Limited and the London Stock Exchange PLC), none of whom shall be responsible for any error or omission in the Index.

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. 

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.    In order to achieve this, the Investment Manager uses ESG scores to populate its own proprietary ESG scorecard which it uses to assess and monitor its investments.  The Fund seeks to avoid those companies it rates as “Failing to meet standards” on that proprietary scorecard. The selection criteria may not be disapplied or overridden by the Investment Manager. 

When an investee company is rated as ‘Failing to meet standards’ on its proprietary ESG scorecard, the Investment Manager will engage with that issuer for a period of up to 18 months to allow the company to implement change, otherwise the Fund will exit that position.  

The team recognises that ESG factors can create risks and opportunities for companies and look for companies who may benefit from this. 

In order to measure and monitor the environmental characteristics of the Fund, the Investment Manager utilises a proprietary scorecard which measures each investee company against not only financial and business characteristics, but also relevant social and environmental metrics.  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. 

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.