Main changes to the fund

Given our average holding period is more than six years, our activity levels over the period were typically low. We did, however, add to the fund’s existing holdings in NatWest and GlaxoSmithKline. NatWest has the potential to deliver attractive returns to its shareholders in the form of both dividends and share buybacks. GlaxoSmithKline’s shares, meanwhile, trade on a c.50% discount to those of AstraZeneca, its closest peer, despite its attractive pipeline of new therapies and treatments.

We reduced the holding in 3i, given its strong performance and, in turn, the size to which the position had grown. We also reduced the position in Nordea, given our concerns around its exposure to commercial real estate loans.

We sold our investment in Cisco. While it retains a dominant position in a growing industry we no longer regard it as one of our ‘best ideas’ so we redeployed the capital elsewhere in the portfolio.

Explaining the fund’s performance

The fund returned 3.0% over the period, outperforming the FTSE All-Share index, which returned 2.6%¹.

3i was our top performer. Its largest holding, European discount retailer Action, continues to go from strength to strength. Over the last five years, it has grown its sales and cash earnings almost twice as quickly as its peers. Action now boasts over 2,200 stores across Europe and expects this number to double.

Direct Line was our biggest detractor. It warned that inflation (particularly in the cost of repairing damaged cars) meant that its profits would fall short of expectations and scrapped its fourth-quarter dividend. Direct Line’s problems were, in part, company specific. At the same time, however, its industry peers are starting to feel similar pressures and Direct Line’s more forward-looking pricing should benefit it going forward.

Looking ahead

Despite a consistently grim narrative, UK consumer spending continues to hold up better than expected, helped by the stock of excess savings accumulated during the pandemic and by the fact that the majority of UK homes are owned without a mortgage, which is blunting the impact of higher interest rates.

UK equities remain deeply out of favour. And while it is difficult to identify what might cause that to change in the short term, we believe it is significant that many of the companies in our portfolio are buying back their own shares in addition to paying dividends. Add some capital growth to this equation (something we are optimistic about given the competitive strength of the portfolio) and we believe we can deliver attractive returns to our investors.