(Formerly PFS Brompton UK Recovery Unit Trust) Short report 30 June 2016
Directory Authorised unit trust manager and registrar Maitland Institutional Services Ltd Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW Telephone: 01245 398950 Fax: 01245 398951 Website: www.maitlandgroup.com (Authorised and regulated by the Financial Conduct Authority) Customer service centre Maitland Institutional Services Ltd Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW Telephone: 0345 026 4288 Fax: 0845 280 2416 E-mail: pfsuk@phoenixfundservices.com (Authorised and regulated by the Financial Conduct Authority) Directors of the manager P.J. Foley-Brickley S. Georgala (appointed 24 August 2015) D. Jones R.W. Leedham D.W. Munting Investment manager Brompton Asset Management LLP 1 Knightsbridge Green, London SW1X 7QA (Authorised and regulated by the Financial Conduct Authority) Trustee National Westminster Bank Plc Trustee & Depositary Services Younger Building, 1st Floor, 3 Redheughs Avenue, Edinburgh EH12 9RH (Authorised and regulated by the Financial Conduct Authority) Independent auditor KPMG LLP Chartered Accountants & Registered Auditor 15 Canada Square, London E14 5GL MI Brompton UK Recovery Unit Trust 1
Investment objective and policy The investment objective of the MI Brompton UK Recovery Unit Trust (the fund) is to achieve capital growth. The fund will invest principally in the securities of UK Companies quoted on the London Stock Exchange that are experiencing difficult trading or that have growth prospects that are not duly recognised by the market. In addition to ordinary shares the fund may also invest in fixed interest securities, preference shares, debt securities convertible to ordinary stock, money market instruments, deposits and any other permitted asset type deemed appropriate to meet the investment objective. The fund may also invest outside the UK. Investment manager's report for the year ended 30 June 2016 Performance The MI Brompton UK Recovery Unit Trust fell 5.64% over the year to 30 June 2016, underperforming the UK equity market, which gained 3.43% while cash as measured by the three-month UK Interbank Rate returned 0.58%. A principal reason for the underperformance was the fund s bias towards small and medium-sized companies, which fell 3.85% over the year while large companies gained 5.41%. The fund also suffered from stock-specific weakness related to the stockmarket turmoil following the Brexit referendum vote. At the year end, the gain from the fund s July 2002 inception was 196.63% compared with the UK stockmarket s 154.03% return while cash returned 45.12%. Manager s review The year under review was a volatile period for UK equities. Investors were nervous during the third quarter of 2015 as they attempted to gauge the gravity of China s economic growth slowdown. One particular cause for concern was Beijing s August decision to allow the renminbi to fall, a drop that if sustained could prove deflationary. Beijing engineered a further fall in the renminbi in January 2016, causing an even more severe bout of share price weakness. The second major factor behind investor nervousness was the realisation that the US monetary policy cycle was about to turn up after a long period of stability and quantitative easing. In December, the Federal Reserve finally announced a quarter point rise in the Fed Funds rate to 0.5%, the first such rise since 2006. This was, however, followed by a relief rally after the Fed said it expected only gradual increases in interest rates in response to expected economic growth and rates would remain for some time below levels that might prevail over the longer term. In the event, there were no further rises during the year under review and weak employment data generated expectations that further rises might be differed until the end of 2016 or later. Such expectations were fuelled by the short-term shock administered to global markets by the UK s surprise Brexit vote in its European Union membership referendum in June. As a result of sterling s post-vote weakness, the dollar, yen and euro ended June 8.88%, 17.70% and 8.66% higher respectively against the pound. 2 MI Brompton UK Recovery Unit Trust
Investment manager's report continued Manager s review (continued) There was an unusually large disparity in sectoral returns over the year under review driven by concerns about Chinese growth and by investor expectations that interest rates would stay lower for longer in the UK and the US and quantitative easing would persist in the eurozone and Japan. The strongest sector was consumer goods, where positive returns of 23.35% were driven by low interest rates. Utilities, fuelled by the declining bond yields, returned 20.27% while energy gained 18.99%, driven mainly by the 27.81% oil price rise over the final quarter. By contrast financial stocks retreated 17.81% as expectations of rising interest rates were deferred, consumer services retreated 8.05% in response to competitive threats to retailers from online shopping while basic materials stocks were driven 4.81% lower in response to China s growth slowdown. Portfolio review Within the portfolio, some of the strongest returns among large and medium-sized companies held at the start of the year came in sectors such as basic materials, industrials and consumer goods. The strongest performer was Hochschild Mining, which gained a stronger investor after it restored its balance sheet with a deep discount rights issue in which the fund participated. As a result its shares returned 113.69%. Melrose, a private equity-style quoted vehicle, returned 74.97% partly through a cash return to shareholders following a large disposal while Alent, the chemicals and materials company, returned 35.84% following a cash bid from a US chemicals group. Strong consumer stocks included Dr Pepper Snapple and Unilever, up 35.65% and 35.19% respectively, while two industrial stocks, Halma and Rentokil Initial returned 35.51% and 32.83% respectively. There was, however, conspicuous weakness in sectors such as financial services, retailing and housebuilding. Among financial stocks, Royal Bank of Scotland, International Personal Finance and Lloyds Banking retreated 51.18%, 35.03% and 34.01% respectively. In retailing, N Brown fell 44.35% following a profit warning while two housebuilders, Bovis Homes and Redrow, fell 31.72% and 27.71% respectively. Among smaller stocks, Dods, the specialist publisher and training company, recovered 75.02% in response to further evidence of improved trading while Serica Energy recovered a 66.08% as it completed a deal to improve its financial position and H&T, the pawnbroking chain, rose 34.03% as trading stabilised as a result of an improvement in the gold price. Brammer, however, fell 79.55% in response to reduced demand among oil-dependent Nordic customers and industrial weakness within the eurozone while Northbridge Industrial Services fell 56.85% as its energy supplies business weakened. In addition to participating in Hochschild s deep-discount rights issue, the fund took part in fundraisings by Northbridge and Gresham House Strategic, formerly Spark Ventures. The fund also increased a number of holdings on weakness. These included Anglo American, Brammer, N Brown, Dods, Glaxo, International Personal Finance, LiDCO, Northbridge Industrial, Pearson, Rio Tinto, Royal Bank of Scotland, Royal Dutch Shell, RSA Insurance and Standard Life. The Peel Hotels holding was also increased to bring it up to its planned weighting. New positions were initiated in Intertek and Serco. The two full disposals were Alent and Cable & Wireless Communications, both in response to takeover bids, while partial profits were taken in BT, Hochschild and Rentokil Initial. MI Brompton UK Recovery Unit Trust 3
Investment manager's report continued Outlook Monetary conditions over the early summer of 2016 looked benign, with the inflation-adjusted growth rate of the global money supply running ahead of industrial output, leaving liquidity available for continued economic growth over the rest of the year and for investment in financial assets. The strongest positive trends were in evidence in the large developing economies, underpinning recent strong trends in emerging market equities and bonds. Economic data disclosed over the early summer suggested that global economic growth was improving and that the global economic effects of the UK s Brexit vote had been negligible although the UK impact appeared significant. In response, the Bank of England monetary policy committee appeared to be signalling a further softening of monetary policy to cushion any longer-term blow to industrial and consumer confidence caused by the Brexit vote. In the US, however, after initial nervousness, investor interest rate expectations suggested there would be a further increase in the Fed Funds Target Rate at the end of 2016 or in early 2017. While, the Brexit vote is likely to reduce UK economic growth this year, US trends have been stronger, with gross domestic product appearing to be running at about 2.3% over the early summer and money supply trends remaining healthy. Geopolitical trends may, however, continue to have a destabilising effect on stockmarket performance, with the outcome of November s US presidential election a key area of concern among investors. In such circumstances, relative performance among companies and sectors may vary significantly over the second half of 2016, emphasising the importance of stock selection in generating performance. 4 MI Brompton UK Recovery Unit Trust
Comparative tables Accounting and distribution dates Accounting Distribution Final 30 June 31 August Interim 31 December Change in net assets per unit Accumulation units 30.06.2016 p 30.06.2015 p 30.06.2014 p Opening net asset value per unit 312.73 290.55 252.66 Return before operating charges^ -5.25 28.78 44.38 Operating charges -6.75-6.60-6.49 Return after operating charges^ -12.00 22.18 37.89 Closing net asset value per unit 300.73 312.73 290.55 Retained distributions on accumulation units 2.61 1.67 1.25 ^After direct transaction costs of -0.15-0.21 0.12 Performance Return after charges -3.84% 7.63% 15.00% Other Information Closing net asset value 6,946,131 7,204,345 6,636,438 Closing number of units 2,309,773 2,303,664 2,284,118 Operating charges 2.23% 2.20% 2.25% Direct transaction costs 0.05% 0.07% 0.04% Prices Highest unit price 322.13 325.45 304.41 Lowest unit price 272.82 265.99 254.64 Operating charges include indirect costs incurred in the maintenance and running of the fund, as disclosed (but not limited to) the detailed expenses within the statement of total return. The figures used within this table have been calculated against the average net asset value for the accounting period. The return after charges is calculated as the closing net asset value per unit minus the opening net asset value per unit as a % of the opening net asset value per unit. Direct transaction costs include fees, commissions, transfer taxes and duties in the purchasing and selling of investments, which are offset (where applicable) against any dilution levies charged within the accounting period. The figures used within the table have been calculated against the average net asset value for the accounting period. MI Brompton UK Recovery Unit Trust 5
Comparative tables continued Risk and reward profile The risk and reward indicator table demonstrates where the fund ranks in terms of its potential risk and reward. The higher the rank the greater the potential reward but the greater the risk of losing money. It is based on past data, may change over time and may not be a reliable indication of the future risk profile of the fund. The shaded area in the table below shows the fund s ranking on the risk and reward indicator. Typically lower rewards, lower risk Typically higher rewards, higher risk 1 2 3 4 5 6 7 The fund is ranked five because funds of this type have experienced medium to high rises and falls in value in the past. Please note that even the lowest risk class can lose you money and that extreme market circumstances can mean you suffer severe losses in all cases. The indicator does not take into account the following risks of investing in this fund: There may be cases where the company in which the fund owns shares falls into receivership due to trading difficulties. This could cause losses to the fund and reduce your investment. The fund invests in particular stocks that are experiencing difficulties or are undervalued. It may, therefore, not perform in line with funds that have a broader investment policy. For further risk information please see the prospectus. Risk warning An investment in a unit trust should be regarded as a medium to long-term investment. Investors should be aware that the price of units and the revenue from them can fall as well as rise and investors may not receive back the full amount invested. Past performance is not a guide to future performance. Investments denominated in currencies other than the base currency are subject to fluctuation in exchange rates, which can be favourable or unfavourable. 6 MI Brompton UK Recovery Unit Trust
Sector spread of investments All sectors in percentage order are shown below Sector % of Fund as at 30.06.16 Industrials 27.31 Financials 18.61 Consumer services 18.22 Basic materials 7.82 Consumer goods 7.79 Technology 4.71 Healthcare 3.60 Telecommunications 3.38 Oil & gas 2.77 Net other assets 5.79 Sector % of Fund as at 30.06.15 Industrials 25.66 Financials 21.01 Consumer services 17.39 Consumer goods 8.19 Telecommunications 6.28 Basic materials 5.87 Technology 4.56 Healthcare 3.63 Oil & gas 1.85 Net other assets 5.56 MI Brompton UK Recovery Unit Trust 7
Major holdings The top ten holdings at the end of each year are shown below Holding % of Fund as at 30.06.16 Hochschild Mining 2.91 Johnson Service 2.79 Halma 2.77 Anglo American 2.74 Sage 2.66 Booker 2.65 DS Smith 2.33 Rentokil Initial 2.31 Hogg Robinson 2.29 RSA Insurance 2.28 Holding % of Fund as at 30.06.15 BT 2.64 Johnson Service 2.58 Capital & Counties Properties 2.49 Booker 2.48 Bovis Homes 2.41 Redrow 2.39 Rentokil Initial 2.28 DS Smith 2.25 Provident Financial 2.21 Cable & Wireless Communications 2.17 8 MI Brompton UK Recovery Unit Trust
General information Authorised status The MI Brompton UK Recovery Unit Trust (the fund) is an authorised unit trust scheme and UCITS scheme operating under chapter 5 of COLL. The fund qualifies for certification under the UCITS directive but does not currently have a UCITS certificate. The fund was established on 5 September 2006 and authorised by the FCA on 6 September 2006. The fund does not intend to have an interest in immovable property. Unitholders are not liable for the debts of the fund. Buying and selling of units The authorised unit trust manager will accept orders for the purchase and sale of units on normal business days between 8.30 and 16.30. Instructions to buy or sell units may either be in writing to: Maitland Institutional Services Ltd, Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW, or by telephone on 0345 026 4288. The authorised unit trust manager has the right to establish facilities for recording telephone calls made or received on this telephone line. A contract note will be issued by close of business on the next business day after the dealing date to confirm the transaction. Report and accounts This document is a short report of MI Brompton UK Recovery Unit Trust for the year ended 30 June 2016. The full report and accounts for the fund is available free of charge upon written request to Maitland Institutional Services Ltd, Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW. Other information The information in this report is designed to enable you to make an informed judgement on the activities of the fund during the period it covers and the results of those activities at the end of the period. Significant Information On 1 June 2015 the authorised unit trust manager, Phoenix Fund Services (UK) Ltd (PFS), became a subsidiary of Maitland International Holdings plc. On 4 April 2016 PFS was subsequently renamed Maitland Institutional Services Ltd to reflect the change in ownership. As a result of this, the name of the scheme and fund changed, and the prefix of PFS was replaced with MI. Risk warning An investment in a unit trust should be regarded as a medium to long-term investment. Investors should be aware that the price of units and the revenue from them can fall as well as rise and investors may not receive back the full amount invested. Past performance is not a guide to future performance. Investments denominated in currencies other than the base currency are subject to fluctuation in exchange rates, which can be favourable or unfavourable. MI Brompton UK Recovery Unit Trust 9
Registered in England No 6252939. Authorised and regulated by the Financial Conduct Authority.