Annual Report 2017

Investment Strategies

Regional Equity Strategies

UK Equities

It has been a turbulent year for UK politics, in large part due to the widely unexpected outcome to June's general election, which saw the Conservative Government lose its parliamentary majority. The inconclusive result created further political and economic uncertainty in the UK and has exacerbated the negative effect on investors’ perceptions of and demand for UK-exposed assets.

Brexit negotiations finally began in earnest after the triggering of Article 50 of the Treaty on European Union towards the end of March. This marked the most significant step yet in the changing economic and political relationship between the UK and the rest of Europe. The road is unsurprisingly proving to be long and winding and shrouded in uncertainty. However, sterling's weakness has led to a rapid and substantial improvement in the UK's terms of trade, acting as an important safety valve for the UK economy and helping to give a significant boost to the manufacturing sector. However, business and consumer confidence remains fragile and economic growth has slowed.

Political volatility has not hampered returns from the UK stock market over the past 12 months. Substantial double-digit returns were achieved in the basic materials, financials, oil and gas and industrials sectors, with utilities, telecoms and healthcare being the only sectors generating negative returns. Large-cap, overseas-earning constituents of the FTSE 100 Index were early major beneficiaries of sterling's marked devaluation in the wake of 2016's Brexit vote, but the mid and small-cap areas of the market outperformed large caps over the year.

Our four UK equities strategies are each managed by a different team, which each apply distinct approaches to investing.

The UK Dynamic strategy seeks opportunities in mispriced or undervalued companies that are making positive changes to transform their businesses, usually either in the form of new management teams, new business strategies, or both. Recent examples of new additions to the portfolio include global industrial supplies company Xaar, financial information company Euromoney and property business St Modwen Properties. All three companies now have new management teams, which are implementing new, exciting strategies.

Our UK Equity Income strategy continues to find value in companies with UK domestic economy exposure, particularly in the construction/house building sector, which currently accounts for roughly 10 percent of the overall portfolio. It is well-flagged that not enough homes are being built in Britain while the recent Grenfell Tower tragedy has placed the quality of Britain's social housing in the spotlight. Elsewhere, the strategy is also currently overweight in the financial, industrial and commodity-related sectors. We also see plenty of value in small-cap stocks, with the portfolio currently having one of its highest ever allocations to small caps.

Our UK Growth strategy has a clear portfolio theme of backing innovative companies investing in disruptive technologies. A good example of where changes are rapidly happening is in the area of digital advertising. To harness its undoubted potential, the industry needs greater accountability and credibility, which is an area exploited by one of our portfolio holdings, Ebiquity, as the world's largest media auditing company. Another clear structural growth opportunity is presented by cyber security, which has led to our large technology overweight position in NCC Group, a world leader in this field.

The fourth UK equity strategy, UK Opportunities, has long been concerned by the artificial inflation of asset prices by central bank policies, including quantitative easing and emergency-level interest rates, which have been in place since the early months of the Global Financial Crisis. A focus on absolute rather than relative valuations has led us to hold a large cash balance in recent years, rather than risk our clients' capital by investing in overvalued stocks at or near what we believe may prove to be the top of the current market cycle.