The JOHCM UK Equity Income Fund enters its latest update with solid outperformance, renewed momentum across several long-held positions, and an improving dividend trajectory
Performance
The UK market was flat, following the all-time highs that were made the month before. The FTSE AllShare Index was up 0.02%. The Fund also positively returned 1.59%, outperforming the market by 1.58% on a relative basis. Year-to-date, the Fund is up 19.42% compared to the market’s 21.12% gain.
Looking at the peer group, the Fund ranks 24th in the Equity Income sector over the last 12 months. On a longer-term basis, the Fund ranks in the 1st decile over three, five years and ten years. The Fund remains the best in the sector since its inception in 2004.
There were three positive drivers during the month, ITV, certain large caps, and banks.
- ITV (up 15% relative) rose following the announcement of a potential bid for its broadcast business by Comcast (the owner of Sky). This could unlock significant upside if consummated and was a welcome development.
- Results and subsequent meetings with management have shown that three FTSE 100 stocks that we own (that have been in the ‘doll drums’ for years) are delivering better results and have a ‘spring in their step’ – BP, GSK and Vodafone.
- Vodafone unexpectedly returned to dividend growth, having previously been expected to hold its dividend flat. This reflects a renewed level of confidence by the Board, in the company’s now largely completed strategic repositioning, the stabilisation of its German operations, and the strong early momentum of the newly merged Vodafone/Three UK business.
- BP has had three solid quarters in a row, is making progress with its asset sale / debt reduction programme and has announced its largest oil find in 25 years; Bumerangue in Brazil. Any resolution of the Russia / Ukraine situation may bring some value back for its c. 20% stake in Rosneft.
- Glaxo had very strong results, which included raised guidance. We cover this below.
Together these three stocks, account for 10% of the Fund, are now all growing their dividends and all have active share buybacks.
- Banks: The banks sector, which has been a consistent outperformer for the last 2 years, continued to move higher. Most stocks were up 5-6% relative, with Standard Chartered up 13% relative. All the banks had strong Q3 results, and most are due to update on medium term strategic plans in the first half of next year. We expect these to include upgraded return targets and a confirmation of shareholder return expectations for the medium term.
Fund performance benefited toward the end of the month, both immediately before and after the Budget, as UK domestic names began to recover from extremely depressed levels. This was particularly evident in holdings such as Bellway and our brick manufacturers (Forterra and Ibstock). We would expect this momentum to continue, as the Budget should pave the way for the Bank of England to lower interest rates in December and again during next year.
On the negative side, the UK retail sector was weak, which partly offset the positive relative performance drivers noted above.
Marks & Spencer was down 15% relative and Currys’ down 10% relative. Marks & Spencer held a very informative investor event which detailed qualitatively the medium-term strategy; however, the market was disappointed the event did not highlight quantitative targets – we would expect them to do so next year. These two stocks are in the well owned ‘compounder’ bucket. They are expensive on a relative basis, and do not have the same ‘normalisation’ potential as Marks & Spencer.
Other stocks that weakened during the month included Johnson Matthey, which has performed very well year to date, where there was some profit taking, post results. First Group, fell post its results due to the absence of a share buyback extension, (we cover this below). Picton and New River Retail within the property sector, along with Ashmore, were also weak contributors to performance.
Portfolio Activity
Despite the market’s rise this year, we do not currently see any holdings as “absolute” sells. As a result, to free up capital for the additions outlined below, we have trimmed positions that still offer upside but present less relative opportunity compared with the rest of the portfolio.
Positions Trimmed:
We trimmed Sainsbury and Drax. Sainsbury reported another set of good results, it grew its dividend slightly faster than we had expected and extended its buyback. Operational performance in the core food business was strong with Argos showing some year-on-year strengthening. The issue here is entirely valuation with the stock trading on 13/14x EPS.
Drax has performed well – up 4x from the Covid low and close to its all-time high. Whilst the stock looks optically very cheap, some of this will normalise out in the medium term as high priced electricity hedges fall away.
We also reduced positions that had reached our 300bp maximum active weight—for example, ITV. We continued to gently trim certain banks, such as Standard Chartered, that have performed particularly well. In addition, several holdings, including ZigUp and Energean, were adjusted back to their target weights.
Positions Added To:
We continued to build our position in GSK, a recent addition to the portfolio. The company delivered strong results, with notable resilience in areas where the market has expressed the greatest scepticism—such as HIV. The shares currently trade on a P/E of 9x, a valuation that is based on earnings forecasts that assume the company will miss its own sales target by roughly 15%, despite management’s confidence in achieving it.
Other additions included those stocks that are under near term earnings pressure – this included both our UK brick names – which were weak until the Budget recovery – (Ibstock and Forterra), which could both double on a 3-year view, if the number of houses being built increased to c. 200,000 per annum. Other stocks in this bucket of near-term earnings pressure that were added to were Vesuvius and to a lesser extent Morgan Advanced Materials.
We also added to our position in Kier following recent share-price weakness and a highly informative capital markets event. The site visit, held at a water treatment facility, highlighted the scale of investment being directed into the water sector over the current regulatory cycle, around £105bn, roughly double the level of the previous five years—and underscored how well positioned Kier is to support clients such as Severn Trent in delivering this programme.
We added to Conduit, where results showed early evidence of portfolio stability, following management change.
Over the last 6 months we had materially reduced our position in FirstGroup following a very strong run, which had seen the shares more than double to c. 235p earlier in the year. The shares had drifted back and then fell markedly on their most recent results announcement.
Fund Dividend – 2025/2026
We upgraded our Fund dividend guidance for calendar 2025 in April from >5% growth (vs 2024) to 6-8%. In early October we upgraded this again to 9-10% growth. We are currently running at 11% growth. Four dividends remain to be declared which go ex dividend in December.
In comparison to the wider market, this is a very pleasing outcome, given the economic uncertainties. A recent Computershare report forecast underlying UK dividend growth (excluding special dividends) of 2.5% for 2025. Once again, the Fund’s dividend growth has materially outpaced the UK benchmark, which should, in time, translate into improved relative performance.
The Fund’s near-historic yield now stands at 4.6%.
However, as we head into 2026, a greater number of risks are present. Their ultimate impact will only become clear as trading patterns emerge over the first half of next year. Key areas to watch include recruitment—where recent commentary points to stabilisation and signs of improvement in some markets—the pace of recovery in the UK housing sector, and a small number of holdings with specific idiosyncratic risks.
Taking these factors into account, our initial guidance is for a low single-digit increase in the Fund’s 2026 dividend. This would place the Fund’s yield modestly above the historic level referenced above. We will provide our first progress update against this guidance at the end of Q1 2026, following the publication of full-year results.
