Chelverton UK Equity Growth Fund: December 2018 Fund Commentary

Fund Update
December 2018 Print article
James Baker Fund Manager

After a brief respite in November, the Fund had a difficult end to the year as the equity market resumed its downward trend with some gusto. There were no particular themes in the sell-off with a wide range of portfolio holdings being impacted. Amongst the Fund’s worst fallers were a number of our more highly valued stocks like Ideagen, Tatton Asset Management and Future, which all experienced a de-rating. B&M European Value Retail fell after reporting flattening organic sales growth, Boku fell sharply on the back of a poorly received acquisition whilst On the Beach retreated despite reassuring full year results at the end of November, as investors worried about the outlook for large ticket consumer spending. On a positive note, Amerisur Resources responded well to an oil discovery, Hollywood Bowl rallied on the back of good results and JTC recovered strongly from an earlier sell-off.

During the month we didn’t add any new positions to the Fund but focused on top-slicing holdings which had held up well and were becoming relatively expensive like Hollywood Bowl, Oxford Metrics, Coats and Ashmore and recycling the proceeds into holdings which we felt were becoming oversold, like Elementis, Synthomer, Brooks MacDonald, Boku, Volution and Tyman.

Going into 2019, the market faces a high degree of political uncertainty. On the home front, there’s still no clarity on BREXIT with the government quite possibly losing control of the process to a parliamentary free-for-all as the clock ticks down. At the global level, trade tariffs are beginning to bite and cause a slowdown in industrial production. However, with an eye to the next election, it would make sense for Trump to herald “another great deal” having wrung some concessions from the Chinese (who have been making conciliatory noises), on the back of which any industrial slowdown could be quite shallow with growth possibly resuming in the latter half of 2019. Whatever happens, after the remorseless sell-off over the last quarter, the Fund’s overseas industrial holdings are, in our view, already discounting quite a meaningful slowdown on an EV/sales basis. The next issue to worry investors could be the US Federal government shut-down, which if unresolved will start to impact government suppliers and regulated entities ability to do business in the USA. Notwithstanding these issues it’s worth reflecting that global inflation remains low, and monetary policy is still relatively benign and neither suggest a sharp slowdown in growth is likely, let alone inevitable. On this basis, equities, particularly UK listed ones which have sold-off particularly severely, in our view look attractive. The Fund itself is trading on its lowest forward aggregated PER valuation since launch.