In the summer holiday month of August the equity market rose, with the portfolio slightly ahead of the benchmark MSCI World index. There was some intra-month volatility with a similar flavour to that seen in July, with concerns around the AI trade in the market in the middle of the month driven by murmurings on weaker than expected revenue growth at the AI labs Anthropic and OpenAI. However, this didn’t stop the IT sector regaining its losses of July. What’s interesting from a portfolio point of view is that the recovery in IT services, data and software companies that had been basketed as ‘AI losers’ continued. This reverses the trend of low or negative beta that the fund had been experiencing for a protracted period of time, where the portfolio’s market moves tend to move in the opposite direction of the market. This is just one month’s observation, and August is a particularly unusual one in the calendar when it comes to market trading, so we should be careful not to draw too many conclusions about whether these trends will continue. It is nonetheless interesting that strength in the portfolio was broad based.

Whilst AI continues to dominate market news flow, as we return from the summer break there is also much focus on the path of interest rates given the rising yields seen in many sovereign bond markets. It is often said that higher bond yields bode badly for equities as they provide stiffer competition for investors’ capital. We note that a similar narrative prevailed when we were emerging from the ultra-low-interest rate environment after the coronavirus pandemic, and this did not stop the equity market going on a historic bull run. We also note that not all companies were caught in the updraft. The portfolio’s total yield (dividend yield plus share buyback yield) is currently forecast at over 5%, amply covered by the free cash flow yield of 6% (and growing). In a world where other equity yields are low or non-existent and inflation is persistently high, we believe this represents compelling value in both relative and absolute terms.