Market review

North American equity market indices were volatile over the year ended 31 January 2023, however, ended higher in sterling terms on a total return basis as the US dollar strengthened against the pound, from a weighted average of $1.37 to the pound in 2022 to a weighted average of $1.22 to the pound in the current year. This inflated the valuations on the balance sheet in sterling terms.

A combination of higher interest rates and surging inflation – due in part to a booming jobs market – caused North American share prices to fall sharply from early 2022 onwards. Growth-focused stocks, such as technology companies, which had been among the strongest stock market performers in the years leading up to 2022, were particularly hard hit. These stocks are more sensitive to higher interest rates. As US inflation hit a 40-year high, the Federal Reserve (“Fed”) became increasingly aggressive in its response. It raised its main interest rate by 0.25% in March 2022, 0.50% in May 2022 and by 0.75% at each of its next four meetings. Signs of progress in the battle against inflation emerged in November 2022 when the annual consumer inflation figure (for the twelve months to October) showed an unexpected drop to 7.7%. Further falls in the annual consumer inflation rate increased investor confidence that price pressures in the US were subsiding. Accordingly, the Fed increased its main interest rate by a more measured 0.50% in December, down from the 0.75% rate hikes of previous months.

The energy, materials and healthcare sectors were the strongest performers within the Russell 1000 Value index, the Company’s primary reference index, while the information technology, communication services and real estate sectors were the primary market laggards for the period.


The Company returned 9.60% on a NAV basis in sterling terms for the year ended 31 January 2023, outperforming the 8.51% return of its primary reference index, the Russell 1000 Value Index (total return) in sterling terms. The revenue account remained in good shape, building upon the record established in prior years.

At a sector level, the largest contributor to the Company’s performance was information technology due to stock selection and, to a lesser extent, having an underweight exposure. The second-largest contributor was real estate, thanks to stock selection, which was partially offset by a small negative effect from being overweight in the sector.

Looking at individual stock contributors to performance included real estate investment trust Gaming & Leisure Properties, its shares rerating higher after the company made some acquisitions of regional casinos. Pharmaceutical company Bristol-Myers Squibb was also a positive. Cash flows remained strong and there were some signs of early successes in the company’s drugs pipeline. The pharmaceutical sector, where Bristol-Myers Squibb is our largest position, was rerated over the period. Oil refiner, Phillips 66, was also a positive for the Company. The diversified energy company benefited from extremely strong refining margins following Russia’s invasion of Ukraine. Also, Phillips 66 completed two acquisitions that increased the company’s exposure to a more stable part of the energy value chain while also growing the earnings power of the company.

On the negative side, the main detractor from the Company’s performance at a sector level was consumer discretionary, due to stock selection and, to a lesser extent, having an overweight exposure. The second-largest detractor was energy, with weaker stock selection that was partially offset by a positive effect from being overweight to the sector.

The largest individual stock detractors from performance were clothing companies HanesBrands and VF Corporation. Shares in HanesBrands were weak due to a delay in the company’s new management implementing changes during a period when excessive apparel inventories pressurised all stocks in the industry. Meanwhile, VF Corporation suffered from a continued lack of traction and a subsequent change of management at its important Vans brand. Also, China’s strict ‘zero-Covid’ policy adversely affected both demand for VF Corporation’s products and the company’s supply chain.

Canadian financial services company CI Financial was also a detractor over the period. Its shares de-rated as investors were worried about the company’s increased leverage after its acquisition of several high-quality registered investment advisors.

Portfolio activity

The investments in the Company’s portfolio remained consistent with our investment process which aims to identify high-quality, cash generative companies. During the year, market volatility created opportunities to add quality companies into the portfolio at compelling prices. The changes in the portfolio are summarised below.

We re-initiated a position in Home Depot as a best-in-class retailer, led by a high-quality management team. At the time that we re-initiated, the shares were caught in a collective market drawdown that meaningfully detached Home Depot’s shares from their intrinsic value. The company has a strong real estate position from a location standpoint, best-in-class execution and a culture that has led to far superior sales per square foot metrics than its closest peer. Home Depot operates in a near duopoly with rational pricing.

We believe that CVS Health (“CVS”) is making significant improvements to the quality of the business, pivoting it towards more attractive, structurally growing areas of healthcare. The key strategic initiative is to lower the retail pharmacy footprint and invest in primary care delivery. In the latter area, there is a significant opportunity for growth as 30% of Americans do not have a primary care provider and the industry is moving towards value-based care, which offers more attractive returns. CVS can build on the existing range of basic services offered at its HealthHUBs and MinuteClinics to bring a more affordable model of care delivery.

We believe PNC Financial Services (“PNC”) can continue to take deposit and loan market share over time as the bank’s scale gives it capacity to invest in technology as banking moves further into the digital world. In addition, we think there is a long runway for growth from PNC’s BBVA acquisition that will create additional upside. PNC historically has a good underwriting track record and we believe it will hold up well relative to peers in a tough market environment.

We initiated a position in Merck, with the view that its modest valuation captures concerns on both the potential to overpay for large scale M&A as well as the concentration in Keytruda, which will lose patent protection in 2028. We believe that Merck has other growth drivers that will help offset this view. For example, Gardasil’s capacity expansion, beginning in 2023, will help as will additional M&A that capitalises on opportunities like the Acceleron deal. Further information on the company can be found in the case study on page 35 of the 2023 Annual Report.

We sold the position in Nutrien after a rally in fertiliser prices drove the company’s earnings to unsustainably high levels. We expect earnings to revert lower over time, along with the stock price.

We disposed of the holding in Class I railroad operator Union Pacific given multiple quarters of mixed performance. The company has faced operational challenges, combined with a high relative valuation that embeds faster growth over the next year than we believe is attainable. Union Pacific remains a high-quality operator, but, at current valuations, better opportunities can be found elsewhere within cyclicals.

We sold out of the holding in Genuine Parts Company, a high-quality distributor that focuses on two distinct segments – the automotive aftermarket parts and a broad industrial offering. The company’s valuation expanded from a market multiple to a 30-40% premium on peak earnings.

We sold the position in Huntington Bancshares on fears that consensus expense expectations for 2023 were too low and needed to be adjusted upwards.

We disposed of the holding in Gilead Sciences on the view that the company’s recent acquisitions will not provide quite the level of commercial upside that was originally hoped for. Therefore, upside is dependent on success in some clinical trials, where the outlook is more limited. While Gilead continues to execute reasonably well on its base business, this appears to be fairly well captured by the stock’s current valuation. Gilead remains a solid, quality company, but M&A deals that were needed to rejuvenate interest in the stock may struggle to generate attractive returns.

We sold the position in HanesBrands due to management’s inability to improve the company’s weakened operations given the demand drop that affected cash flows. While the company’s turnaround plan to reduce complexity, focus on the most profitable products and grow the Champion brand had strong merits, the unwinding of demand tailwinds from the pandemic has proved to be too strong. We sold the holding, as the timing of any recovery did not justify the embedded risk of retaining a position.

We sold the position in utility CMS Energy early in the period on valuation concerns but bought it back later on, as a pullback in the company’s shares gave us the opportunity to re-establish a holding in a company that we regard as a best-in-class operator in its sector.

Dividend growth

The Company’s strong track record of dividend growth continued over the review period. A number of holdings grew their dividends above our long-term average, with several announcing increases in the double digits.

The highest increase was PNC Financial Services Group, which increased its dividend by 20%. Other notable increases came from home-improvement retailer Home Depot, which increased its dividend by 15%; oil refiner Philips 66, with a 12% increase; Broadcom, a provider of semiconductor and infrastructure software services, which increased the payout by 12% and telecommunications equipment firm Cogent Communications, which raised its dividend by 11%.

Three other companies that increased dividends by 10% were CVS Health, the owner of several healthcare brands, Analog Devices, the semiconductor manufacturer, and Royal Bank of Canada

Additionally, one holding announced special payments to shareholders during the review period. Derivatives exchange operator CME Group declared an annual variable dividend of US$4.50 per share in December 2022. The company uses this approach to facilitate paying out all cash that it generates over the year beyond a minimum threshold. This compares favourably to the prior year variable dividend of $3.3.


With major central banks, led by the Fed, continuing to tighten monetary policy in an effort to control inflation, the risk of an economic slowdown remains. However, the likelihood of a US recession seems to have fallen lately, helped by a relatively robust labour market. Although corporate earnings are still being revised down, we see some interesting investment opportunities at current levels and, as a result, have become more constructive on equities as an asset class. We continue to see improvement in supply chains globally and continued advancement on this front will be one component on reducing inflation.