Investment StrategiesRegional Equity Strategies
Our UK equity strategies experienced mixed investment performance in a year that was defined by the UK electorate’s decision to leave the European Union, although the long term performance of all four strategies remains very strong. Despite investors turning their backs on the asset class because of uncertainty ahead of the EU referendum and after the ‘Leave’ outcome, flows into our UK strategies were positive in aggregate.
|FUND NAME||Benchmark||Base Currency||1 year %||3 years %pa||5 years % pa|
|JOHCM UK Dynamic Fund||A||GBP||16.29||8.65||16.82|
|JOHCM UK Equity Income Fund||A||GBP||11.37||6.77||15.18|
|JOHCM UK Growth Fund||A||GBP||5.14||5.10||14.56|
|JOHCM UK Opportunities Fund||A||GBP||19.32||11.03||14.07|
|A: FTSE All-Share Total Return Index (12 noon adjusted)||GBP||16.43||6.41||10.96|
June’s UK referendum on membership of the European Union proved an inflection point in UK politics, in the fortunes of the UK equity market and in the currency. The Brexit outcome, which had not been widely predicted either by opinion polls or the media, resulted in a rally in bonds, bond proxies and foreign currency-earning companies in the equity market and an immediate sharp fall in the share prices of domestic companies and financials. Sterling fell heavily against major currencies including the US Dollar and Euro. Property funds experienced substantial redemption demands, with some forced to limit outflows. Some of these moves became exaggerated. With initial data providing comfort that the UK economy is not yet experiencing severe headwinds, there has been a recovery in the areas hit hardest in the aftermath of the referendum, such as property, shares, banks and domestically-oriented companies. Indeed, the FTSE 100 Index closed in on the 7,000 mark as the period ended after large-cap overseas earners were boosted by Sterling’s slide in value in September on talk of a ‘hard Brexit’ (the UK leaving the EU on terms that would not include access to the EU’s single market in goods and services).
The market environment outlined above led to significant moves in the relative performance of our UK equity strategies. Three of the four strategies (JOHCM UK Equity Income, JOHCM UK Dynamic and JOHCM UK Growth) suffered after the referendum from their economic sensitivity and exposure to domestic stocks and financials, but have recovered towards the end of the 2016 Financial Year. This pattern is characteristic of many funds with a style bias towards value rather than growth or quality; many of the UK companies in the last category have rarely traded at higher multiples of earnings and cash flow.
Looking at each strategy in turn, the JOHCM UK Dynamic Fund finished slightly behind its benchmark in the 2016 Financial Year but benefited from a strong share price recoveries in resource companies such as Anglo American and Acacia Mining. The biggest negative was the portfolio’s combined overweight and stock selection in financials, with Barclays, Man Group and Lloyds Banking Group among the laggards.
Our JOHCM UK Equity Income Fund, which has a value-based approach, also lagged its benchmark, with Brexit causing some short term underperformance, in part because of a longstanding significant overweight exposure to financials. Our avoidance of expensive bond proxies within the consumer staples sector also proved unhelpful. We used the Brexit market sell-off to add to domestic-facing stocks where valuations had fallen to particularly compelling levels.
Looking ahead, our UK Equity Income team believes that the return of inflationary pressures may see bond yields finally begin to rise materially from their current historic lows. An increase in bond yields would have a significantly positive effect on the portfolio’s relative performance given the headwinds it has faced from falling bond yields over the last three years.
Our UK Growth strategy employs a contrarian investment approach, often buying underappreciated growth companies with potential for improvement at the lower end of the market cap spectrum. Broadly speaking, sector performance has exhibited clear momentum trends for much of the past two years, so this strategy has struggled, hurt by the outperformance of many of the large consumer staples companies in which it is underweight and by the underperformance of a number of the financials which it owns. These performance patterns have played out in a similar way in previous investment cycles and, as expected, the manager’s patience and commitment to his investment approach has led to strong long term performance.
Our fourth UK equity strategy, UK Opportunities, exhibits different characteristics to the other JOHCM UK equity strategies, with a preference for reliable industrial companies and utilities rather than financials and with an emphasis on compound growth stocks. It has benefited accordingly, outperforming the FTSE All-Share Total Return Index over the year and proving particularly resilient during the Brexit-related market dislocation.