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Laura Foll and James Henderson, Portfolio Managers of Lowland Investment Company, deliver an update on the Company, highlighting factors currently impacting the UK market, the key drivers of performance, and recent portfolio activity.
From January, Lowland Investment Company’s Commentary will be merged into the Factsheet. The new, and improved, merged Factsheet document will still be accessible via the ‘Quicklinks’ and ‘Documents’ sections on Lowland Investment Company’s webpage.
UK equity markets recovered in October as the FTSE AllShare Index rose 3.1%. UK Government bonds recovered strongly following volatility in September caused by the UK Government’s tax-cutting plans, while sterling also rallied towards the end of the month. Sentiment towards the UK improved after the previously announced tax cuts were reversed and there were hopes that the new Prime Minister could offer the UK more stability. This had the biggest positive impact on the share prices of large and medium sized companies. The FTSE 100 Index of large companies rose 3.0% while the FTSE 250 Index rose 4.5% (all figures given are total return, in sterling terms).
The Company underperformed the benchmark, returning 2.9% while the FTSE All-Share Index benchmark rose 3.1% during October. Over the same time period, its AIC UK Equity Income peer group rose 2.6%. We have always had a multi-cap approach to income investing as this broadens the potential investment universe beyond a relatively select number of large UK company dividend payers. So far this year, our larger than benchmark position in smaller companies has been a headwind to relative performance. Small-sized companies again underperformed the benchmark, while large and medium sized companies outperformed. At the sector level, the energy companies were the largest detractors from returns due to UK natural gas price weakness and concerns of a potential windfall tax on the profits of energy firms.
In October, we initiated a new position in housebuilder Bellway and added to the position in Land Securities. The UK property market has suffered recently as rising interest rates make mortgages less affordable for potential buyers, therefore reducing demand. Bellway has fallen significantly so far this year and was trading at a large discount relative to the value of its assets at the end of October, which we felt could already reflect a substantial fall in the value of its properties. We also added to the position in Land Securities which was trading at a large discount to its net asset value. These positions were funded by trimming the position in defence company BAE systems following a period of strong performance.
October saw an improvement in sentiment towards the UK following very turbulent period. The market reacted positively to the appointment of the new Prime Minister, buoying hopes of a period of less political instability in the UK. We have seen a recovery in the share price of our more domestically exposed companies. We are adding to companies which we believe are significantly undervalued and where we see potentially good opportunities for long term growth.