JOHCM UK Equity Income Fund have provided their latest update covering performance, portfolio activity and outlook for 2025.
Performance
The UK market, which started the year strongly in January, stabilised in February. The performance gap between large cap and mid/small gap – which was unusually wide in January (c. 5%) – widened further in February and is now 9-11% year-to-date. This was a continued headwind to Fund relative performance, only partially offset by other factors. The FTSE All-Share Index ended up 1.32%. The Fund was up 0.45%.
Looking at the peer group, the Fund is the 3rd best performing Fund in the Equity Income sector over the last 12 months. On a longer-term basis, the Fund is ranked in the 3rd decile over three years, the 2nd decile over five years and the 1st decile over 10 years. The Fund remains the best in the sector since its inception in 2004. [1]
The results season started in earnest in February. In aggregate, results were robust albeit there were three statements that were notably weak, which we cover below. The bank sector continued to be one of the strongest performers in the market following robust results across the board – themes evident were near-term upgrades (Standard Chartered / Lloyds), confidence or upgrades to long-term targets (NatWest) and better than expected capital returns (a step change in the dividend payout ratio at NatWest and a higher share buyback at Lloyds). The stocks were up between 5-15% relative, with Lloyds and Standard Chartered the standouts.
Other strong results included International Personal Finance (up 4% relative) which beat on results and the dividend and also launched a share buyback, Centrica (up 10% relative) where clarity on capital allocation was welcomed by the market, IAG (up 4% relative) which beat forecasts and started a new €1bn share buyback and Aviva (up 4% relative) which also exceeded forecasts.
The three negative statements were Conduit Insurance, Morgan Advanced Materials and WPP. Conduit (down 15% relative) announced a higher cost associated with the Californian wildfires than expected (and compared to other companies). It now trades on a 30% discount to historic tangible book value and yields 7%. The board will come under pressure to realise value if these valuation dynamics persist. WPP (down 15% relative) results included sluggish forward revenue guidance (c. 2-3 percentage points below expectations), which led, in our view, to an exaggerated negative reaction. Whilst disappointing, the downgrade related to macroeconomic weakness in certain geographies, with evidence that a number of strategic initiatives were progressing well (e.g. WPP Open, merging of different agencies, AI etc).
Hammerson and Glencore results were also viewed adversely by the market, with the former down 4% relative and the latter down 15% relative. We viewed both results more favourably than other market commentors. Hammerson, post its restructuring / assets sales is clearly on the front foot, whilst Glencore announced a new share buyback and a detailed outline of its copper exposure (both currently producing assets and its pipeline of potential new green- and brown-field owned developments), which is one of the best positioned portfolios of assets in copper globally. The low Glencore share price (which has underperformed) coupled with the nature of management (very shareholder focused) means something is likely to happen. Together with the results, they announced that they were reviewing a switch of the listing from the UK to the US, whilst year-to-date there have been rumours of a merger with Rio Tinto and a sale of its African copper assets. This theme of low share prices creating management action or pressure was also evident at BP, where Elliott has reportedly built a stake of 5% and is pushing for a more material change than BP presented at its capital market day towards the end of the month.
Other weak names were FDM, SThree and various other small caps (e.g. Eurocell). The non -ownership of Rolls-Royce (which does not meet our yield criteria) cost the Fund c. 50 bp relative during the month.
On the positive side, as well as the results-driven moves noted above, Costain was strong (up 25% relative) as an aggressive buyer set the agenda. Most of our retail stocks rebounded – a delayed response to positive trading updates – in January, with Wickes, DFS, Marks & Spencer and Currys all performing well.
[1] Source: Lipper, 28.02.25
Portfolio Activity
A number of changes were made to the Fund in February.
The first was the addition of Schroders – the first time we have owned this stock in the 20-year history of the Fund. Why have we added it? First, management change is likely to lead to some decisive actions: the business has too much cost, it is too diverse and the good parts – of which there are a number – are not articulated well. Second, under the bonnet there are a number of high quality businesses, e.g. the wealth management division which, unlike its UK listed peers, is truly global, is growing quicker than those peers partly for that reason, and revenue margins are already at a defendable level (vs others that still need to see some deflation).
Reductions included BP where, early in the month as it became clear Elliott was pressuring management to change strategy, our position went above our 300 bp maximum active. Some of the excitement subsided towards the end of the month. We also marked Currys back to 200 bp as it went through the seminal 100p level. Anglo American was reduced as it went over 2,500p, which is within 20% of our full value for the stock. In contrast, as noted above, Glencore hit new lows, with many similar commodities in the earnings mix compared to Anglo American, which means it should have some correlation in stock price performance.
As noted above, the banking sector continued to stride forward. We modestly reduced our aggregate overweight by taking Standard Chartered and Barclays down a notch, whilst we switched more NatWest into Lloyds which, as we described last month, has 2x as much upside. NatWest Group still has c. 20% upside to its target price. Finally, we marked Costain to its target weight, which is 75bp, following heavy volume / buying interest which pushed it up somewhat.
On the additions side, a number of UK domestic stocks were weak. We added to Forterra, one of the two brick makers we own. Our normalised earnings, which are based on 200,000 new homes being constructed (vs the government target of 300,000) is 30-33p, which would suggest the stock could double from its current price based on a PER of 10x. We added to a number of retailers (funded by the reduction in Currys noted above) – Marks & Spencer, which continues to take market share in food, Sainsbury’s and Wickes. We also added to Ashmore where 60% of its market cap is now represented by cash / excess capital / seed investments. Finally, we continued to add to FDM, which had a weak trading update in January.
Outlook
It is clear that UK inflation will experience something of a hump during the first half of 2025. Different members of the Monetary Policy Committee have divergent views on the degree to which they should look through this hump and continue to ease policy, given there is usually a 12-month lag between policy change and economic impact. Consequently, the outcome is likely to be something of a compromise and, as such, our central case is only one rate cut per quarter for the rest of 2025.
At some stage during this year, UK consumers are likely to respond to this easing of monetary policy. The economy has been through an extraordinary de-gearing phase since the GFC in 2008. Back then, there were around £800bn more loans than deposits in the UK but that situation has reversed, such that there are now around £500bn more deposits than loans. As interest rates and deposit income fall, demand for credit is likely to expand and, interestingly, the banks have reported a moderate pick-up of loan demand in recent months. This potential dynamic gets discussed very little compared to the constant analysis of the public sector fiscal situation, which is of course somewhat of a mirror of the private sector situation.
A notable feature of 2025 has been the marked underperformance of US equities. Reasons for this are many and varied but include the potential end of the war in Ukraine, the very demanding multiples that prevail and the outperformance of value in style in other parts of the world. This is despite (or maybe because of) President Trump’s ‘America First’ strategy. The US Dollar has begun to underperform too as the size of the US fiscal deficit gets more attention. If this phase marks the end of US exceptionalism, then other international equity markets and investment styles have a long way to catch up, including the UK.
Valuations in the UK continue to be undemanding and we see considerable upside across the Fund. The historic yield on the Fund sits at around 5% and prospects for growth in 2025 remain strong. We will update our dividend growth guidance next month when the results season has finished, with an upgrade to existing guidance (which is for growth of >5%) likely. Furthermore, the very low valuations across the portfolio mean that companies are also retiring around 5% (on average) of their shares in issue each year via share buybacks, driving a total distribution yield of around 10%. Compared to 2-year bond yields of 4.2%, this has to offer some attractions, particularly given our 20-year track record of growing our dividend distributions compound by 9% per annum.
Balance sheets across the Fund are in very good shape, and a large number of shares are trading below their asset value, which in many cases is made up of property or other monetisable assets. Many other stocks trade below replacement cost, suggesting it’s cheaper to buy than build. On a price to book basis, the Fund has only been cheaper 9% of the time over its 20-year life.
Lastly, the gentle rise in Sterling, despite all the gloom in the financial press, is very notable. £/Euro closed the month at 1.213, its highest level since the summer of 2016 when there was a particularly unexpected referendum result.
