UK Equity Income Fund - January 2012 update

The market was broadly flat over the month of December, with the FTSE All Share returning 0.78% and large caps continuing to outperform mid and small caps. During the month, a number of large cap defensive sectors such as pharmaceuticals, tobacco and mobile telephony stocks all performed strongly.

The Fund performed broadly in line with both the sector and the FTSE All-Share during December, although the Fund enjoyed a strong final quarter of 2011 relative to both peers and the broader market. During December, overweight positions in stocks with sustainable high yields such as Vodafone and a number of tobacco stocks aided performance. Several defensive companies with growing dividends and attractive valuations – such as Pearson, Compass Group, RPC and Babcock – also aided returns. On a relative basis, avoiding domestic banks such as Lloyds and Barclays was positive as these were weaker on financial market contagion risk from the Euro-zone sovereign crisis. Gains were mitigated by Burberry and Hargreaves Lansdown, but each of these was due more to macroeconomic factors, with the Euro-zone crisis weighing on economic growth expectations and the financial sector.

Activity was limited over the month. We sold Randgold Resources while adding a new holding in London & Stamford Properties, an active property management company we feel offers an attractive and sustainable yield.

Looking into 2012, although the UK economy and financial system are vulnerable to events in Europe, we are not overly cautious given that valuations remain supportive and there remains encouraging signs around US economic recovery. The US banking system is also much farther through the de-leveraging process than that in Europe. Furthermore, the UK market isn’t a pure reflection of the UK economy; we will continue to focus on companies whose businesses demonstrate strong franchises and robust business models and where the company is able to deliver sustainable and growing dividends. We believe that in the current low interest rate and low growth environment, companies with sustainable and growing dividends offer an attractive return.