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Global Equity Income Portfolio: June 2022

Having been down close to 6% mid-month the global index (FTSE All-World Index) finished the month flat at 0.2%. Global equities have now declined 12.4% year to date. With both employment and inflation high, central banks are generally continuing to tighten monetary policy. The Global Equity Income model portfolio returned 1.8%, ahead of both the global index and the +0.5% EAA Fund Global Equity Income peer group, however this was behind the FTSE All-World High Dividend Index return of 2.6%

Against the atmosphere of carnival celebrations of Her Majesty the Queen’s Jubilee, the high inflation in the United Kingdom means that we have taken a less favourable view on the outlook for the country’s economy. Inflation was reported at 9% during the month. While rising interest rates ought to benefit net interest margins, Lloyds Bank management have indicated that they envisage their own costs to rise which may off set much of this. While there are at present no signs of stress, we have become concerned that a prolonged high cost of living rise might result in a higher proportion of bad debts in the future than is currently expected. Typically, high income strategies have large exposures of financial services companies given the yields available. There appears no immediate threat to the dividend at Lloyds but along with similarly exposed US banks, the holding is under review.

Trading activity was minimal with the position in spin off Warner Brothers sold.

AT&T (+12.9%) was the best performing holding as investors appear to better value the utility like nature of the company.  BP shares continued to perform strongly (+12.5%) against the background of high hydrocarbon prices. Pleasingly the position in VW, purchased in the previous month gained 11%. Disappointingly, Roche experienced a late-stage clinical trial failure of a promising monoclonal antibody resulting in a reduction to forecasted growth. Roche shares declined 8.8%. The two other worst performing holdings were Diageo -8.3% and Admiral -7.2%.

The outlook for all asset prices in a world experiencing quantitative tightening remains challenging. Companies offering higher dividend yields have a value bias. Since the pivot from easing to tightening equities exhibiting a value bias have substantially outperformed growth equities.