Retail sales growth has cooled over the last month, with the year-on-year (YoY) increase falling from 4.1% to 2.6% in March.* With prospects for higher inflation coming through in 2017, much newsflow is centred around the prospect for weaker overall spending this year and the impact this will have on various industries and business segments. How do we maintain exposure to the domestic economy, whilst still protecting the portfolio from the downside risk of pricing and margin pressure?
It always comes back to the companies
The key is stock selection. The CF Canlife UK Equity Income Fund favours quality companies with strong balance sheets, steady earnings growth and a supportive valuation. However, the current phase of the economic cycle also has an impact on the portfolio’s overall construction. This is because inflation risk is company specific. Recent retail earnings releases highlight the health of the online and e-commerce spaces, for example, even as the high street is struggling. As a result, the CF Canlife UK Equity Income Fund has very limited straightforward discretionary exposure to companies that could come under pricing pressure.
Areas of interest
A number of high quality companies in the Fund are partly insulated from inflation. These businesses are a play on quantity rather than price, in subsectors where we have more confidence in volumes. Positions in the portfolio include brick manufacturer Ibstock and Eddie Stobart Logistics (ESL).
The housing market is often debated in the UK and although prices have softened in London recently, it is widely recognised that we have a chronic national supply shortage which should structurally support the housebuilding space over the medium to long-term. Therefore, while we are unsure if the London weakness will be contained, we believe companies such as Ibstock are well placed to capitalise on this theme, particularly given the tailwind of government support for housebuilding. Although not a traditional dividend stock due to its cyclicality, it fits in with our process of seeking dividends from unusual places. The company currently yields 3.6% and has performed very strongly over the last six months.*
Source: Department for Communities & Local Government, Q4 2016 house building release.
The role of freight
Another area that we believe is set to grow is freight and logistics. This is because not only are consumers ordering goods online in ever increasing quantities, the supply chain will not come under pressure from consumers trading down in goods. Budget brands cost just as much to transport as high end versions of the same product. One way we are playing this theme is through ESL, which recently IPO’d onto the market. It has diverse exposure to different end markets, from e-commerce to manufacturing and industrials and we expect the business to benefit from growth in the supply chain and logistics market. ESL has an efficient business model and structurally higher margins than its competitors, which we see as one of its quality characteristics.
Source: ESL 2016 Report and Accounts & the Freight Transport Association 2017 report. Typical reported profit margin based on the top 100 road hauliers.
CF Canlife UK Equity Income Fund
This is one example of the way in which we seek to construct a diversified portfolio, investing in companies exposed to long-term structural growth themes that we believe can deliver sustainable dividend and capital growth. This has been a successful strategy for the Fund, which has been a strong performer over the last three years, beating both the IA UK Equity Income sector average and the FTSE All-Share Index return over this period.
*Source: Bloomberg & Canada Life Investments Research, as at 30/04/2017.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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