Inflation causes and portfolio effects

The recent surge in inflation after a long period of stable, low rates has upset investors and economists. While many investors focus on the headline figures, the causes are complex. These include monetary policy, the pandemic, supply chain disruptions, labour markets, and the Russia/Ukraine conflict and the associated geopolitical fallout. With such varied causes, investors should not be surprised that the effect on individual companies varies widely too. We highlight some positions in the FSV portfolio that have been affected by the above factors and how the portfolio may be affected by changes in them going forward.

• Half-year report: With FSV giving a daily NAV update, there was no news on performance, other than the manager’s comment. The company has declared an interim dividend of 2.30p per share, a 6% increase on the 2.17p paid the previous year. It was paid on 22 June 2022.
• Board changes: The longstanding chairman, Andy Irvine, will step down at the next AGM. Dean Buckley, who is currently the senior non-executive director, will become Chairman. It has also recently been announced that Ominder Dhillon has been appointed as a non-executive director.
• Valuation: With quoted investments, there are no valuation issues. FSV aims to keep a single-digit discount in normal market conditions. It has mostly done this, aided by an active discount management policy. The company has both bought back and sold shares, adding a small amount to investor returns.
• Risks: With a value-based investment philosophy, value being out of favour has constituted a headwind, although one that the manager’s stock-picking has largely overcome to date. The UK market has been a long-term underperformer relative to global markets, and there is a risk that it will remain out of favour.
• Investment summary: While FSV currently trades at the upper end of its discount range, this is better than that of most of its peers. Meanwhile, the stability of the team and the investment process suggest that this performance is built on solid ground. The dividend yield is higher than the average of its peers, suggesting that it should be attractive to investors looking for income alongside capital growth.