Fund manager commentary
The Company’s net asset value fell 2.9% on a total return basis during the month. This compares with a 3.0% decrease in the FTSE All Share 5% Capped Index over the same period.
A new position was initiated in Intercontinental Hotels, the hotel operator. IHG’s portfolio is comprised primarily of franchised hotels from an established and diverse group of brands. We believe that the company is well placed to grow in coming years as a result of its scale, a strong brand portfolio, favourable demographics and continued macro-economic recovery.
The positions in Rio Tinto and BHP Billiton, the diversified international mining and resources companies were both increased. We believe mining sector fundamentals are slowly improving after a protracted period of poor performance. The improvement in both US and European economic growth prospects should help stabilise commodity prices while at the same time cost cutting across the industry together with greater capital discipline will improve cash flows and strengthen balance sheets.
The existing positions in Melrose Industries and Lloyds Bank were increased. Melrose’s strategy is to acquire businesses which are underperforming their potential, improve them over the medium term through a combination of additional investment and increased management focus, and then subsequently realise the additional value created and return it to shareholders. We expect profitability at Lloyds to continue to improve as a result of rising net interest margins, lower costs and lower bad debt provisions. The disposal of the company’s stake in St. James’s Place together with the sale of SWIP to Aberdeen Asset Management will further strengthen Lloyd’s capital position and may help pave the way to a return to dividend payments.
While the valuation of UK equities still appears reasonable when compared with competing asset classes such as cash and bonds, it is more demanding when viewed in isolation. However, the improving economic outlook together with rising business confidence and more stable capital markets suggests we may see an increase in the level of merger and acquisition activity in the year ahead.
As at 31 January 2014
Percentage growth, total return, bid to bid price with net income reinvested in sterling. Basis in accordance with the regulations of the FSA. Past performance is not a guide to future performance. Stock market movements may cause the value of investments and the income from them to fall as well as rise and investors may not get back the amount originally invested. A fund investing in a specific country carries a greater risk than a fund diversified across a range of countries. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. If markets fall, gearing can magnify the negative impact on performance. The discrete annual performance table refers to 12 month periods, ending at the date shown.