Ocean Equity Monthly Manager Commentary – June 2024

Manager view

The UK equity market fell in June as investor attention was focused on the UK general election, snap elections announced in France and the deteriorating situations in the Middle East and Ukraine. As was widely anticipated by the polls and the markets the Labour Party won the general election with a significant 179-seat majority. This convincing victory gives the government a clear mandate to implement their policies to deliver economic growth via initiatives such as stimulating house building and thereby the construction sector more widely. The electorate’s expectation of the new government’s expansionary plans for the economy mean the new administration will be under pressure to deliver but in the short term the UK equity market is likely to respond positively to their clear mandate.

On the economic front, UK headline CPI inflation finally came in at the Bank of England’s target of 2% for the month of May, in line with consensus expectations and a decline from the 2.3% level in April. Falling food prices where the largest contributor to the fall while fuel costs moved higher in line with the rising oil price. Core inflation which excludes food, energy, alcohol and tobacco also fell to 3.5% form 3.9%. Inflation in services, a closely watched data point by the MPC given its dominance of the UK economy, came in at 5.7% in May against 5.9% for April. While this level is ultimately too high, it is encouraging to see it falling away. Despite headline inflation hitting 2% the MPC held interest rates in June at 5.25% for the seventh consecutive meeting. Within the nine-person committee the decision was finely balanced, two members voted for a cut whilst for three other members it was a close call whether to cut or hold. In the end they sat on the fence and decided to hold as they want to see more evidence of a sustainable period of disinflation. Although expectations of an interest rate cut during a general election campaign were remote. Whilst the MPC will be data dependent, the likelihood of a first cut in August or September and another later in the year is becoming more likely. News in early July that shop price inflation had fallen to 0.2% in June, its lowest level since December 2021, will be welcome news for the MPC and consumers.

Cumulative performance

	YTD	6MTHS	1YR	3YR	5YR	Launch
Fund	3.45	3.45	6.49	-3.16	14.57	22.21
Benchmark	7.32	7.32	12.76	24.78	30.52	30.72
IA Sector	6.83	6.83	12.60	9.43	24.36	21.78
Rank in Sector	208/234	208/234	210/232	177/226	174/214	123/210
Quartile	4	4	4	4	4	3

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

Halma

Halma manufactures and distributes mission critical industrial equipment such as fire detection systems, gas and water leak detection equipment, and medical diagnostic instrumentation. Their mission statement is to grow a safer, cleaner, healthier future for everyone, every day. Preliminary results demonstrate the strength of its operating model and help diminish any lingering concerns investors might have over the newish CEO and CFO. It is worth noting that current CEO Marc Ronchetti worked alongside the previous CEO for seven years, in the position of CFO. Whilst moving from CFO to CEO is not always a logical transition, we think Marc is a great leader, capital allocator and is more than capable of driving value creation at Halma. In addition, we think as CFO he had a great feel for the DNA of the business and its culture. From our perspective we see Marc as continuing in the same vein as the previous CEO David Williams and the Prelims suggest he is on the right track. Revenue was +10% to over £2bn for the first time, operating profit +21% and the 21st consecutive year of record profit. The dividend +7%, is the 45th consecutive year of a 5% or more payout. Net debt to EBITDA is at 1.4x giving healthy headroom for accretive M&A, with over 600 companies in the pipeline. They purchased 8 businesses in the year spending £292m and committed £107m, just over 5% of revenue, to R&D. Halma aims to roughly double the size of the business every seven years via a blend of organic and inorganic growth. Their total addressable market is substantial and significantly in excess of current revenue of £2bn. The key for management is to generate growth that delivers incrementally higher profit year on year. This will enable reinvestment back into the business and further acquisitions of businesses with above average group margins. Their record here is compelling. In terms of valuation Halma doesn’t come cheap. It trades on a PE multiple of 26x for FY26 and a FY24 free cash flow yield of 4.3%. But it is worth noting that revenue and profit have CAGR at 12% and 11% respectively over the last 10 years, demonstrating the strength of the business, particularly in challenging economic conditions. That said they have to keep delivering and this could get more challenging the bigger and more complex the organisation becomes. As a result of this elevated valuation and our risk management framework Halma sits in the bottom half of the portfolio in terms of position size. The shares are up almost 20% year-to-date and we think the business is well positioned to grow revenue, profit and cash generation in the near and long-term. This is all underpinned by its exposure to long-term structural growth trends such as safety, urbanisation, healthcare and environmental analysis.

Michael Foster – Lead Portfolio Manager Ocean Equity

June 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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