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 ongoing capital vs labour battle took a material step up in August. In the UK alone, there was travel chaos, overflowing bins and court delays as workers from across a wide range of sectors went on strike to demand increased pay. 

As inflation drives up prices and wages we expect the tensions between the corporate world, capital, and workers, labour, to be an ongoing issue for investors. In the Western world, over the last three decades, the owners of capital have largely benefitted in the form of profit margins, dividends and rents, whilst wage growth for the majority of people has been suppressed. The policy of quantitative easing accelerated this trend as it largely benefitted the owners of assets. 

The outlook for most corporate margins is downwards. However, we see three ways in which our process is helping to protect and grow the cash flows from within the fund: 

1)    Thematic tailwinds. Owning companies in structurally growing industries as growth is a company’s best form of defence 
2)    Management teams who have invested in the future. Companies which have well-invested systems and processes will be able to better compete and offset margin pressures
3)    Companies ‘doing the right thing’ for all stakeholders. We firmly back those management teams who see their employees as equal stakeholders and are prepared to pay fair wages

During August the fund underperformed the benchmark, coming in at -5.35% for the month, against -1.70% for the FTSE All Share. The commodity holdings in BP and Glencore were the fund’s best performers, while ongoing macro concerns dragged down the share prices of SSP, Next, IMI and Future in particular.   

Despite share price moves, all of the companies in the fund reported seeing the benefits of structural growth tailwinds:
-    CRH reported ongoing positive momentum in the US infrastructure-facing side of its business, which is benefitting from President Biden’s increase in infrastructure spend
-    WPP saw like-for-like revenues increase by 8.9% in the first half of 2022 noting that, unlike in recent downturns, their customers are increasing brand investments to support price increases 
-    Mondi reported an underlying growth in revenues of 37% year-on-year, benefitting from industry supply shortages and ongoing demand for recyclable packaging. The group has EUR1bn of expansionary projects underway to support growth in end markets 

The fund is offering very attractive levels of upside. Based on our conservative estimates of one year forward earnings, it is trading on an 8% free cash flow yield which equates to roughly 13.5x P/E. Overall cash flows in the fund are forecast to grow at over 10% pa for the next three years, with low leverage, good structural drivers of growth, management teams investing and a high degree of recurring revenues and inflation-linking. 
 

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. 

The information set out below relates to the Irish-domiciled fund which has been established for this strategy.  To date this fund has not yet been launched.  The UK-domiciled fund follows the same investment strategy, but is not required to comply with the full requirements of SFDR or the Taxonomy Regulation.

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. 

The Investment Manager treats climate change mitigation and adaptation as a material factor within its investment approach in accordance with the EU’s Taxonomy Regulation (TR) (Regulation (EU) 2020/852) and amending Regulation (EU) 2019/2088. Climate change poses fundamental risks and opportunities that can affect the long-term performance and value of investments; the Investment Manager promotes climate change mitigation and adaptation in the following way:  
•    Integration of climate change mitigation and climate change adaptation factors throughout the investment process.
•    Active monitoring of company actions to reduce GHG emissions focusing on the level of disclosure, an assessment of reduction targets, action taken to meet targets and the level of board oversight.
•    Climate change mitigation and climate change adaption-focused engagement with investee companies focused on adoption of a strategy to reduce emissions in line with the Science Based Targets Initiative.
•    Investment into companies developing solutions to climate change mitigation and adaption.

However, due to a lack of reliable, timely and verifiable data, the Investment Manager is unable to make a full assessment of the Fund’s investments against the TR’s Technical Screening Criteria (“TSC”).  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 provide an updated statement on the percentage of the Fund’s alignment with the TR’s TSC once sufficient data is available.
The do no significant harm principle only applies to those investments underlying the financial product that take into account the EU criteria for environmentally sustainable economic activities.

The investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable economic activities.

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.