The Sceptre UK Fund was up by 1.8% in April which compares to a 2.2% rise in the FT All Share index. Since May 2005 the fund has a compound annual return of 20.8% gross (16.7% net) and a 12 month return of 17.7% gross (13.6% net).

Weakness in two stocks in the portfolio gave us the opportunity to add to our positions and we also initiated a small position in a new stock. The only selling transaction in the portfolio was the final stage of the 50% overall reduction in the fund’s exposure to the Lloyd’s insurance market following the record results of 2006 (and a 50% increase in the market price of our holding). It is our understanding that the unusually high insurance premiums on marine and property assets in the Gulf of Mexico following two years of very high hurricane damage are not set to continue this year and, with 2006 being a remarkably low hurricane damage year, we are very unlikely to see a repeat of last year’s earnings. We have taken the decision to retain a small weighting, the sector is not correlated with the general equity market, it trades on a very low multiple (our stock on a P/E of 6) and has a very solid investment return which forms a substantial part of the profitability of the company.

With a portfolio of stocks which averages about 15 holdings it is unusual for us to find a new addition to the portfolio and particularly exciting because this one has a number of defensive characteristics which make it especially attractive. The company has negligible net debt and, with a recent history of low maintenance capital expenditure and double digit operating margins and is highly cash generative. Through small “strategic” acquisitions and organic growth the company is managing to generate high single digit growth which could move to double digit growth in the near term. With a dividend yield of almost 4% and a commitment to return “surplus” cash to shareholders we think that we have found a solid investment.

As well as researching newly “discovered” companies, our search for new ideas includes the re-evaluation of companies we have previously admired but not invested in due to their market price and the ongoing monitoring of stocks that used to be part of the portfolio but were sold due to their market price approaching our calculation of “fair value”. We do not find many companies that are trading below our own calculation of “fair” value and certainly extremely few that are trading at a price that gives us our “margin of safety” – but we keep looking and know that the market will provide us with opportunities as long as we remain patient. In the meantime we retain a 15% cash weighting, not as a negative market call, but because we have not found enough companies with sufficient upside to include in the portfolio following the sale of two of our largest positions in the last few months.

As always, if you have any questions on our approach or performance, please let us know.

Chris Broadhurst
CEO