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Ocean Equity Monthly Manager Commentary – August 2024

Manager view

The UK equity market fell sharply at the beginning of the month as investors focused on weak US employment data that unnerved markets. At the same time, sentiment was heavily impacted by a sharp fall in the Japanese equity market. Investors were forced to unwind their Yen ‘carry trade’ positions – selling Japanese equities – as the Yen strengthened in response to the Bank of Japan increasing interest rates.

UK headline inflation rose to 2.2% in July, primarily due to gas and electricity prices which have fallen less than they did 12 months ago. Whilst this was more than the Bank of England’s mandated level of 2% as reported in May and June, it was below expectations of 2.3%. Encouragingly, core-CPI inflation – which excludes food, energy, alcohol and tobacco – came in at 3.3% for July, down from the 3.5% in June. In addition, services inflation, which is closely watched by the Bank of England and has been relatively stubborn of late, eased to 5.2% in July, compared to 5.7% in June. In other economic data, the unemployment rate fell to 4.2% down from 4.4% for the March to May period.

UK GDP growth increased by 0.6% for the second quarter of 2024 following the 0.7% increase in Q1. The rise was expected but is encouraging, after two years of stagnation, showing the economy is experiencing a healthy cyclical recovery driven by improving external supply conditions and resilient domestic demand.

In the US, CPI inflation fell to 2.9% in July down from 3.0% in June, whilst core inflation also fell to 3.2% from 3.3%. Both readings were better than consensus expectations of ‘unchanged’ and leaves the Federal Reserve much to consider ahead of its next monetary policy meeting on September 18. The market is expecting the Fed to reduce rates during the balance of the year, with the first cut likely to be in September amid increasing signs that the US economy is slowing, following a slowdown in jobs growth.

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

Bunzl

Bunzl manufactures and distributes essential products such as safety and hygiene equipment that are essential to a customer’s everyday operations. It reported interim results during the month which we think demonstrate the attractions of their compounding business model. Whilst revenue was down 0.4% due to deflation and weak US markets, operating profit was up 7.4%, EPS up 6.2% and the dividend was increased by 10.4% – the 29th consecutive year of a 9% or above increase. Encouragingly, management announced a share buyback of £250m and stated that it will likely initiate a further £200m tranche in March 2025. The strong cash generation of the operation saw management set out a pragmatic capital allocation framework for M&A over the next three years. They intend to allocate £700m per annum to accretive M&A opportunities. Any part of the £700m that is not invested will be returned to shareholders. It is worth noting that they have a pipeline of c.1,000 potential acquisitions. They should be able to allocate the capital, whilst paying between 5-7x earnings, for businesses they have known for a while with margins typically above the current rate of 8%. Their record of bolt-on acquisitions at sensible prices and rapidly integrating them into the core business is impressive. There are heightened risks with this strategy, but we think they have the demonstrable experience to keep deploying capital in compelling opportunities. Critically, vendors are minded to sell to Bunzl due to aspects such as their strong culture, performance-based approach and ability to leverage from the scale and cross selling opportunities of such a globally diversified group. Encouragingly, management upgraded the FY24 profit outlook which saw the shares move higher, as investors sense the group is in good shape to grow profits, cash generation and dividends over the medium term.

Michael Foster – Lead Portfolio Manager Ocean Equity

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Ocean Equity Monthly Manager Commentary and Factsheet – August 2024

August 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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| NOT FOR DISTRIBUTION IN THE U.S.A.

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