The UK stock market declined slightly in September, despite continued positive momentum in most other major equity markets. Currency movements explain much of this disparity, with a recovery in the US dollar against most other currencies, undermining some of the consensual market views that have worked well for much of this year. Meanwhile, sterling was also strong, as the Bank of England indicated that interest rates may rise in November. We do not believe that this heralds the start of significantly tighter monetary policy, but it is a sign that the UK economy is in much better shape than many commentators have suggested. Ironically, this led to a minor sell-off in overseas earners and a better performance from more domestically-focused businesses.
Against this backdrop, the fund delivered a modestly positive return. The largest contribution to returns came from AstraZeneca, whose shares had sold off sharply in July after disappointing interim data from the phase III Mystic trial. As we said at the time, we have always believed that the investment case for AstraZeneca is about much more than Mystic – further evidence of this was provided at the European Society for Medical Oncology’s (ESMO) annual conference. Impressive data releases from 2 trials (the Phase III Flaura trial in Tagrisso and the Phase III Pacific trial in Imfinzi) appears to have shifted the market’s attention away from Mystic and back towards AstraZeneca’s much broader drug development pipeline potential. The shares have now recovered all of the Mystic-related share price decline and we believe it is worth reminding investors that the Mystic trial is ongoing – the progression free survival interim data may have disappointed, but we await data for the more important end point, overall survival, which is due early next year.
Another strong performer was Next, which reported interim results that were ahead of market expectations. Trading has clearly improved following the challenging start to the year and, although the environment for clothing sales remains tough, the company’s disciplined management team issued a confident outlook statement and remains positive about long-term prospects. It continues to generate excess cash flow which will be returned to shareholders and, with an estimated yield of over 5%, its shares continue to look very attractively valued.
Meanwhile, other UK-focused businesses, such as BCA Marketplace, Lloyds and Homeserve also performed well. With the exception of BCA Marketplace, which issued a positive trading update at its AGM, there was no specific reason for this positive performance, other than the market’s recent dislike of domestically focused businesses has left these shares, in our view, far too cheap.
By contrast, the largest detractor from performance was Purplebricks. It’s share price declined by almost 20% during the month but it remains more than double the level at which it started the year. The company successfully launched in California during September, and a positive trading update towards the end of the month confirmed continued strong growth in the UK and Australia, as well as good, albeit early, initial progress in the US.
Spire Healthcare, meanwhile, weakened after the release of its interim results. Although the results themselves were broadly in line with expectations, the company warned that its full year performance was likely to fall short of forecasts, due to a slowdown in e-referrals from the NHS. Although this is disappointing, we remain confident in the long-term investment case here. The NHS is under increasing financial strain and this, alongside an aging population, will lead to more people turning towards private healthcare facilities, through private medical insurance, self-pay or through the NHS itself. As a well-invested provider of private hospital services, Spire is very well positioned to benefit from this long-term trend.
Outsourcing firm Capita weakened during September. Its half-year results were a little disappointing, with slower progress in cost-cutting than anticipated, a lower bid pipeline and lower cash flow generation weighing on the share price. Nevertheless, the business is still on the path towards rehabilitation and the shares have recovered somewhat from the declines that greeted its operational difficulties in 2016. Following a recent meeting with the company and the subsequent announcement of its new CEO, we are more encouraged about the outlook for Capita. Much work has been done in recent months to improve the business and its transparency to investors and, as a consequence, we have become more confident in its prospects.
During the month, we added to the position in budget greetings card retailer, Card Factory, after its interim results were greeted by a sharp share price fall. The company’s decision to not pass on currency and living wage-related input price increases to its customers has negatively impacted its financial results in the near-term but it makes absolute sense from a long-term strategic perspective. Consequently, we were keen to take advantage of the share price decline to add to our position in this well-managed, highly-competitive and cash generative retailer.
In terms of outlook, September brought some evidence of a slight reversal in the trends that have been a headwind for the fund’s relative performance over the last few months. This is an encouraging development, and although there are sound reasons to believe this could become more established in the months ahead, it is too early to conclude that a more meaningful reassessment of the fundamental outlook for markets is now underway.
From a long-term perspective, however, we are convinced that the portfolio is positioned appropriately for the macroeconomic and market environment we see unfolding in the period ahead. As a result, we remain very confident in the outlook for attractively positive long-term returns.