100 Club: Thorne dumps holdings on inflation fears

The co-manager of the £153m Threadneedle UK Smaller Companies fund said that certain holdings which had previously looked likely to perform well now appeared vulnerable following the EU referendum result.

Because of this he sold names including engineering firm Keller Group and retirement housebuilder McCarthy & Stone.

“With inflation increasing off the devaluation of sterling, those businesses that don’t have pricing power will see their profitability come under pressure,” Mr Thorne said.

“We did have names that were those kind of businesses. We held them because we thought we could buy businesses on low PE multiples. We have exited a few of those.

“They were OK businesses. We thought they were too cheap and the management were doing things we thought would get returns. But Brexit pulled the rug from under their feet.”

While UK inflation has been subdued in recent years, the slump in sterling triggered by a vote to leave the EU could drive it up as imports become more expensive.

According to the Office for National Statistics, the consumer prices index measure of inflation reached 0.6 per cent in July - its highest level since November 2014 - with some commentators predicting a more significant uptick in the coming months as currency weakness filters through.

Meanwhile Mr Thorne, like a number of his peers, has taken advantage of the post-referendum sell-off by topping up on holdings he expects to fare well.

This includes carpet business Victoria, which the manager expects to increase market share by acquiring European rivals.

“They are looking to buy some businesses in Europe,” he said. “The owners [of some European peers] have got to the stage where they want to sell their businesses.

“The currency is against Victoria but they are obviously going to negotiate hard.”

Similarly, he has added to a holding in Scottish broadcaster STV.

“ITV fell because of concerns about advertising revenue [falling after the Brexit vote] but STV is developing its production so its less sensitive to changes in that,” he said.

Though Mr Thorne also believes housebuilders were unfairly punished by markets in the wake of the vote, this has not been enough to persuade him to invest.

“We did look at the housebuilders, because we thought the sell-off was overdone,” he said. “They have a positive macro scenario with stable land prices, but the businesses aren’t that differentiated.

“We were more disposed to buying businesses that are differentiated or have an effective monopoly.”

Some other favoured holdings include drinks wholesaling business Conviviality, which made up 2.3 per cent of the fund at the end of June, and premium chocolate name Hotel Chocolat.

The manager is also seeing potential in sectors with little reliance on the UK economy. At the end of June, for example, the fund had a 21.7 per cent weighting to information technology, compared with 10.2 per cent in its index.

“We are very overweight technology,” he said. “That’s because there are great, innovative businesses with global distribution channels. That’s uncorrelated to the UK.”

According to FE Analytics the fund has returned 44 per cent over three years, compared with 29.7 per cent from its IA UK Smaller Companies peer group.