Against the backdrop of much improved market sentiment in July, particularly for the so-called ‘quality growth’ names that we favour, the Fund enjoyed a positive month.
The end of June saw a succession of sharp market sell-offs, after what had already been a rotten six months for risk assets. This felt like capitulation to us as the share prices of many great businesses were indiscriminately slammed heading into the end of the quarter. Regular readers will know that we have been adding steadily to our investments over 2022 on the conviction that share prices had become oversold and that there were opportunities to add to our holdings in some brilliant businesses at more than reasonable prices. The recovery seen in these share prices over the last month is an early indicator that the wider market is waking up to this, but we expect confidence to return slowly and, in the meantime, ongoing high inflation readings will surely provide the fuel for plenty of volatility.
During July, we took the opportunity of share price weakness to add to our positions in Halma, Keywords, JD Sports and Fever-Tree. We also had the excitement of adding a new position to the fund – Howden Joinery. We have followed Howden’s for many years and have always considered the UK’s leading kitchen supplier to be an example of Best of British business, with strong margins and consistently impressive growth. Over the decade plus that we have followed Howden’s the valuation had always looked too dear, up until now… with their shares down over 40% since late-2021, we at last had the opportunity to invest in Howden’s at a price that offers healthy upside in our opinion. We fully expect a moderation in kitchen sales over coming quarters as we lap the lockdown home-renovation boost and head into trickier economic times, however we feel that this is more than discounted in the share price and are confident that Howden’s will continue to grow at a healthy rate through the cycle. Howdens say that their average kitchen lasts for 20 years – a good holding period for their shares to aim for!
Recent weeks saw a long list of companies reporting (no doubt exec’s getting H1 results out of the way before heading on holiday for August!) and the tone was overwhelmingly positive. It is increasingly clear in these inflationary times which businesses have genuine pricing power and can defend their margins and which do not. Croda and LSE Group stood out for us as two examples of robust pricing power in their resent results. Croda, the supplier of natural chemicals, in fact saw margins rise this year as their business shifted increasingly towards higher value-add products in the life science and cosmetics industries. Meanwhile, LSE Group delivered an outstanding 50% EBITDA margin as they began to deliver synergies on their acquisition of Refinitiv.
These purchases were funded from existing cash and from the disposal of our position in miner Rio Tinto, leaving us with no direct exposure to the mining sector. Rio Tinto served the Fund well over a long holding period, but we felt that ongoing troubles in the Chinese property sector will structurally lower demand for iron ore for the foreseeable future and, quite simply, we felt that Howden’s, etc looked like a better home for our investor’s capital.
The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.
Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.