The Sceptre UK Fund was up by 0.3% in April (after fees) compared to the FT All Share index which was up by 0.9%. The main drivers of our performance were the mid-cap names with the 2 new names added in March (Media and Technology) both moving ahead strongly over the month.
Our biggest holding was up by 5% following a 1st Quarter trading update and is now up over 50% since we first bought stock in May last year, following this latest move there is less upside to our appraisal of fair value and we used this opportunity to reduce the weighting from 15% to 12%. We also added to one of our new holdings, this was our only trading activity for the month. Conversely, our 3 FTSE 100 holdings underperformed by between 2.5% and 4.5% in April as the index was again pushed forward by the commodity related stocks.
The bias in the gains of the main index to the Natural Resources sector continued, with the top 10 performers in the FTSE 100 in April as follows:
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Top 10 FTSE 100 performers in April
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Stock
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30 Day Change
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P/E
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Market Cap (£m)
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Kazakhmys
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19.4%
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16.4
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5,322
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PartyGaming
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17.1%
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34.7
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6,030
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Antofagasta
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14.4%
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12.0
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4,640
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BHP Billiton
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10.4%
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37.1
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27,844
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Amvescap
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10.0%
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32.8
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4,857
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Xstrata
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10.0%
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13.7
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12,913
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Anglo American
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8.7%
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33.4
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35,398
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Brambles
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7.9%
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30.3
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3,206
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Cairn Energy
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7.7%
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84.8
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3,545
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Rio Tinto
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6.5%
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14.6
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31,935
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As we have said before we do not invest in companies which derive the bulk of their profits from the sale of commodities, as we do not believe we have the ability to make long-term forecasts of the future price that the underlying commodities will trade at, which means that these stocks will not become part of our portfolio. We continue to find valuable investments in companies where we believe we can conservatively forecast future earnings which the stock market is undervaluing. In this way we are adding value to the portfolio which is much less vulnerable to external factors that are out of our control and out of our circle of competence.
Our 3rd largest holding (7.5% weighting) is a manufacturing company with 40+ factories across Europe and is exposed to the rise in energy prices from both power (electricity) and raw materials – its primary raw material is an oil derivative which has increased in-line with the oil price over the past 18 months. It is a reflection on the pricing power and the management strength that this company is able to pass on all the price increases to its clients and has stated that in its results presentations and directly to us. The senior management team has been in place for over 15 years and their continuous and consistent strategy has built a business whose major clients are multi-national groups who have come to rely on the company and its products, frequently as their sole supplier. The business has grown its operating profits by over 10% pa over the past 6 years and we expect this growth will continue to be in the 5%-10% range over the near term. However, the stock is priced for zero growth by the stock market and there is also no premium for its high cash generation or its very experienced and loyal senior management team. If we could be sure of 10% pa growth we would attribute a “fair value” of 18x or 20x earnings for the company - so we know that we are buying a “bargain” at 11x earnings and allowing ourselves a very comfortable safety margin should our earnings expectations not be met. It may never be priced by the market at 20x earnings but we can be comfortable in the knowledge that we have an asset which yields 8%+ with a 10% pa growth rate.
Our portfolio remains concentrated with 15 holdings and a cash weighting of 6%.
If you have any questions on the portfolio or our strategy, please let us know,
Chris Broadhurst
CEO
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