Commentary

The fund was down 3.5% in May while the MSCI World High Dividend Yield Index was down 3.0%. Year-to-date, the fund is up 7.9% while the MSCI World High Dividend Yield Index is down 3.4%. Despite the strong year-to-date performance, the portfolio remains cheap below 10x price to earnings.

The largest negative contributors to performance in the month were, in order of impact, BP (-14.2%, total return in local currency), IWG (-14.3%) and Handelsbanken (-5.4%).

BP announced first quarter results with underlying profit of $5 billion. The market capitalisation of BP is $100 billion or 5x first quarter’s annualised underlying profit. BP bought back $2.45 billion of its own shares during the quarter and announced a further $1.75 billion buyback to be completed during the second quarter. The forecast buybacks disappointed the market, sending the shares down almost 9%. Assuming buybacks for the rest of 2023 at $1.75 billion per quarter, total buybacks for 2023 would amount to $7.7 billion. Adding $4.5 billion of expected dividends, total capital return for 2023 is ~$12 billion or ~12% of the current market capitalisation of BP. We believe the shares are very attractive.

The largest positive contributors to performance in the month were, in order of impact, Samsung Electronics (+9.0%), Fairfax (+2.9%) and JD Wetherspoon (+2.9%).

Samsung Electronics (Korean electronics manufacturer) had a good month and year to date. All things ‘AI’ (Artificial intelligence) have rallied strongly, and semiconductors are part of the chain - including memory chips. Currently AI is a small part of memory chip demand, but it is an interesting and growing area to watch. The wider memory semiconductor cycle continues to form a bottom as the inventory overhang is eroded following industry supply discipline through capex cuts earlier in the year. The semiconductor stocks have rallied ahead of a cyclical turn (likely in 3Q) and the valuation case remains attractive.

JD Wetherspoon announced its third quarter trading update revealing that sales growth had accelerated to over 12% compared to a year ago, almost double the rate of the industry. Sales are now comfortably ahead of pre-pandemic levels and the firm is on course for a record year. Profitability however still lags, and due to cost inflation remains lower than in 2019. We expect margins to recover in the coming years, driven by like-

Commentary

for-like sales growth running ahead of inflation.

The company’s net debt position was £738m, approximately £67m lower than before the pandemic – since then the company has invested £185m in new pubs and freehold reversions but has issued 20m new shares which would cost £150m to repurchase at today’s share price. JD Wetherspoon is clearly in a stronger position both financially and competitively than it was at the end of 2019, yet the share price continues to languish at less than half pre-pandemic levels.

Russian holdings

Please note that on 3rd March 2022 the Fund’s investment in Lukoil ADR listed on the London Stock Exchange (LSE) was suspended from trading. Our Valuation Committee considered it was in the Fund’s best interests that the holding of Lukoil ADR be fair value priced (FVP) at zero. In June 2022, we elected for the holding to be converted into local shares (Lukoil PJSC).

Given the current international sanctions on Russian securities and cash balances, we believe that if lifted and the Fund was able to access the local market, the holding in Lukoil PJSC (with a current FVP of zero) would represent 13% of the Fund and cash dividend of 1.6%. We continue to monitor the situation closely.

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