Ocean Equity Monthly Manager Commentary – September 2024

Manager view

The UK equity market had a quiet month as investors initially focused on the upcoming US presidential election. However, increasing tensions in the Middle East, exacerbated by hostilities in Lebanon drew concerns of escalating conflict in the region. The Bank of England’s (BoE) Monetary Policy Committee (MPC) left interest rates on hold at 5% having initiated a first cut in this current cycle in August. The bank suggested it was optimistic rates would fall further, but that the BoE needed more evidence of cooling price pressures. It said, “It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much”. Whilst core inflation was stable at 2.2% in August, service level inflation is proving more persistent. 

The main event during the month was the decision by the Federal Reserve (Fed) to cut interest rates by 50 basis points to a range between 4.75% to 5.00%. This was the first cut since the pandemic and the Fed signalled that more rate reductions would likely follow, boosted by falling inflation. The Fed forecast interest rates would reach 2.75% – 3.00% by 2026, if inflation was at its 2% target rate, confirming the shift in the Fed’s priority from controlling inflation to protecting jobs. However, this needs to be caveated with the fact that they will be guided by the economic data. A cut was widely anticipated but the size of the cut, 50bps rather than 25bps, was the surprising element. Whilst it can be argued that the Federal Reserve was possibly slow in cutting rates – ECB and BoE have already cut – there has been evidence of slightly weaker economic data coming out of the US. Whilst economic data suggests that inflation is coming down towards the 2% mandated level, the full impact of rates rising so quickly in 2022 and 2023 is starting to impact many areas of the economy. The Fed is now focused on ensuring the job market remains fluid, unemployment doesn’t rise too much, and that the economy has a soft landing, justifying their rate cut by stating that “the US economy is in a good place and our decision today is designed to keep it there.” Towards the end of the month, the Chinese authorities announced further monetary and fiscal support aimed at stimulating economic growth and a sense of optimism, as debts within the real estate sector continue to weigh heavily on the wider economy.

Discrete performance

	2023	2022	2021	2020	2019
Fund	8.67%	-22.63%	27.74%	-2.40%	24.04%
IA Sector	7.38%	-9.06%	17.25%	-6.01%	22.24%
Rank in Sector	79/231	202/228	9/222	53/217	80/209
Quartile	2	4	1	1	2

Total Return, Bid to Bid, Tax UK Net, Sterling Terms. Source: Waystone Fund Services UK Limited/Financial Express Analytics. Past performance is not a reliable indicator of future results. The value of your investment and the income derived from it can go down as well as up and you may not get back the money you invested.

Company news

A few portfolio companies issued trading updates during the month. 

Cranswick 

The leading UK food producer of pig and poultry products to UK supermarkets – issued a trading update ahead of their interim results due in late November. Management said that trading in the second quarter had been stronger than previously expected, underpinned by continued robust volume growth in its core UK food business. In addition, it stated that there had been a positive ongoing contribution from their expanding pig farming operations, industry leading service levels coupled with a relentless focus on quality and innovation. As a result, management expect FY25 profits at the top end of expectations. We are encouraged by this update and continue to think the business is well positioned due to significant and ongoing investment into capability at rates ahead of competitors. They have been buying pig farming operations to become less reliant on suppliers and more vertically integrated. Importantly, this should boost the margin profile over the medium term. Further benefit should come from its Pet Product business, which although relatively small, has a good contract to supply Pets at Home. The shares moved sharply higher on this update and have risen by over 30% this year. 

Segro

The company issued a trading update together with further details of their recommended offer to buy Tritax EuroBox. Segro’s portfolio of assets has generated £58m of new headline rent so far in 2024, which is ahead of the equivalent period last year. Customer retention remains robust at 83% and occupancy is broadly unchanged since 30 June 2024, at 94%. Their profitable development programme is expected to generate £48m of future rent with 63% of this pre-let at an average yield on cost of 7.8%. We think the proposed c.£550m acquisition of Tritax EuroBox is a good strategic fit and purchased at an attractive discount to NAV. Critically the assets are relatively new, fit for purpose with a good balance of tenants and located along key European transportation corridors most of which are in current Segro locations. Management believe they can generate synergies as they integrate the assets onto the Segro platform. The deal at £550m v the current Segro market capitalisation of c.£11.5bn is essentially a bolt-on acquisition at the bottom of the property cycle. It is not without risk but as the properties are in existing Segro European locations we believe integration should be reasonably straight forward for this well respected and experienced management team. Segro shares have been dull year to date but offer a dividend yield of 3.7%, loan to value at c.29% and decent prospects over the medium term. Respected CEO David Sleath said: “Our business is performing well as we head into the final months of the year. We are seeing liquidity return to investment markets and we continue to identify attractive opportunities to deploy capital both through asset acquisitions and into our profitable development pipeline, utilising our exceptional land bank.”

Michael Foster – Lead Portfolio Manager Ocean Equity

September 2024

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The Ocean Equity Fund does not have an objective linked to the oceans or marine bio-diversity but the Fund Manager may choose  to invest in companies that derive their revenue from shipping and energy transition sectors.

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