Whatever the cause, be it Brexit, the disastrous mini budget of the Liz Truss era or the prevailing gloom that interest rates will stay higher for longer, the upshot is the same. UK stocks appear unloved and are lagging their international peers. Nonetheless, the dividends paid out by UK corporates are, on average, superior to those paid out by their European counterparts. For a Trust such as ours, where income is the principal feature of the collective investment, we therefore remain in the fortunate position of being able to draw on a wide pool of attractive opportunities.
While small cap stocks remain an important cornerstone of the portfolio in light of the fall in valuations and very attractive dividends paid by some larger cap companies, we have introduced a few more stocks in this cohort into the portfolio. In the longer run, these inclusions offer the potential both of dividend growth and a valuation raise.
We have also been re-visiting the role of European stocks in our portfolio. Here, our goal is to gain exposure to those areas of the industry that we cannot easily access via UK holdings. An example of this would be technology. Germany’s SAP is a fairly recent inclusion to the portfolio. The Baden-Württemberg based multinational develops world leading, enterprise-wide, resource-planning software. It is the largest non-American software company by revenue and the largest German company by market capitalisation1.
Since its foundation in 1972, SAP has grown exponentially through multiple acquisitions. At the time of writing another was announced, LeanIX, a German startup that helps companies map out their software architecture. The acquisition, which is expected to conclude before the end of the year, expands SAP’s suite of tools for business transformation and will facilitate AI-enabled processing. LeanIX is a privately held company and had been a strategic partner of SAP for 10 years.
Seizing new opportunities
Another recent entrant to the portfolio (we initiated a position in July), Smurfit Kappa, one of the world’s largest manufacturers of paper and cardboard packaging, has also been busy on the expansion front. In early September the Dublin-headquartered company announced it planned to merge with US firm WestRock. If the deal goes through, the new entity will be known as Smurfit WestRock and would be listed on the New York stock exchange but still headquartered in Ireland. Smurfit estimates the combined business would have an annual turnover of around US $34bn (£27bn).
Elsewhere, we reduced our exposure to the UK housebuilder Persimmon and diverted it to UK brickmaker Ibstock. The latter has a superior and growing dividend yield and additionally should be more resilient to the prevailing pressures on the UK housing market as its product, bricks, remain the most used building material. And, for Ibstock it makes no difference whether they are used in the construction of homes (private or public), schools, hospitals or warehouses. We were able to add the stock at an attractive valuation.
Finally, we will touch on AstraZeneca, another recently initiated position, an innovator and truly global leader in its field. The British-Swedish multinational pharmaceutical and biotechnology
company has a portfolio of products covering oncology, cardiovascular, gastrointestinal, neuroscience, respiratory, and inflammation among other medical areas. AstraZeneca was instrumental in developing a Covid-19 vaccine and continues to spend heavily in research and development to expand its pipeline of novel drugs and therapies.
As we head into the last quarter of the year, we are hopeful that UK interest rates may now be at or very close to their peak and that further out an economic recovery is pending. However, mindful that this could be slower to materialise than we might like, we continue to assemble a resilient portfolio of quality stocks that should be able to negotiate the challenges that might arise ahead of that elusive recovery.
