The third quarter of 2021 gradually became more uncomfortable for equity markets as wider concerns mounted again.
First among these is inflation, which is proving to be stubborn and the Bank of England (and other central banks) are having to admit that it is proving less ‘transitory’ than they had been suggesting it would be. They are in the unenviable position of needing to bring forward the tapering of their monetary support, admit that base interest rates will need to rise next year, but not be too precipitate about it.
Severe supply chain bottlenecks are serving to slow the pace of the economic recovery as pent-up demand meets persistent COVID-19 restrictions (and typhoons in the Far East), while the demand squeeze is also driving up the cost of energy, exacerbating the inflation problem. Possibly it was naïve to think that the world’s economy could be switched off for eighteen months and then expect everything to be fine when it is all turned on again. Add to this, problems in China where the parlous state of their biggest property company, Evergrande Group, have dented Chinese growth expectations.
Stock markets have ceased their progress as this has unfolded. In London, shares have not made any headway for the best part of six months now and even the high-flying American markets have fallen back to late-June levels. On both sides of the Atlantic, markets have been getting more volatile again.
Depressing though this sounds, much of it does have the feeling of problems that will pass. The supply chain problems will get sorted in time, it is in everyone’s interest that they are and energy prices will reverse at some point (they are notoriously volatile). The central banks will probably be shown to be right about the jump in inflation being temporary just that their timing was rather awry, although they do still need to get interest rates back to more sensible levels.
The Fund’s unit price was up modestly over the quarter, the total return was 1.2% (‘B’ accumulation units). The broad disposition of the Fund’s portfolio is as it was at the end of June, though we no longer hold any social housing investments – see chart, right.
We have held Civitas Social Housing in the portfolio since 2016, but during the quarter we became increasingly uncomfortable with the regulatory scrutiny of some of their ‘approved providers’ and possible governance shortfalls, including allegations of related party transactions by directors. We have sold the holding. A recent new entrant to the portfolio is Kingfisher, owners of B&Q and Screwfix and Castorama in France, the first retailer that we have held for a while (not counting Greggs, which goes from strength to strength). Shares in Kingfisher have fallen around 15% over the past couple of months despite good sales growth, an increased dividend and the announcement of a share buy-back programme.
The table, see right, shows the top fifteen holdings in the Fund at the period end. Croda International has moved up the ranking after excellent interim figures, always good to hear a company say that they expect to be significantly ahead of expectations. Relx returned to form with encouraging results, three of the four divisions are now back at or above pre-COVID levels and management is guiding for 2021 growth to be slightly above historic rates. Smith & Nephew has slipped out of the list as their shares under-performed after interim figures that failed to impress.
Shares in the major mining companies fell quite sharply during August and September, so we have edged back into BHP Group again, similarly, the house builders have suffered over recent weeks so we have been building-up our holding in Berkeley Group again. We supported a rights issue from SDCL Energy Efficiency, adding to this holding along with placings by BBGI Global Infrastructure, Target Healthcare and Tritax Big Box. Our weighting in fixed interest is edging down as the National Grid index-linked issue matures within days of the quarter end, hopefully we will see some opportunities to rebuild in this area soon.