Following a number of negative months it is a pleasant change to have a positive move in the NAV of the fund even though we were behind the over 5% move in the index – all of this outperformance was more than accounted for by the move in the mining sector which now accounts for over 15% of the index by market weight.

Whilst it is somewhat reassuring for the market to give some recognition to the value sitting in our portfolio of stocks, we should not ignore the fact that the market is still acting irrationally in bidding up mining companies and even bank stocks where we have no idea of what their book value really is or what the next few years of earnings and dividends will look like. Also, the large fall in new housing market transactions will lead to further problems for the housebuilders, many of whom have forward agreements in place to buy land at fixed (high) prices over the current calendar year. Their revenues are simply the product of the average price multiplied by the number of homes sold – the fact that volumes are down by 30%+ is much more of an issue than a price move of 5%. Land prices have more than doubled in the past 7 years and now account for close to 30% of the house price compared with around 20% historically. We still believe that opportunities will present themselves in the housebuilding sector, but we feel it is too early in the down cycle and sentiment may well decline further following rights issues, land write-downs and some of the weaker builders closing down or admitting that they are forced to shrink their business – this will provide a must greater margin of safety to our investment.

We remain focussed on our portfolio of 14 companies which we continue to get to know better and all of which have strong market positions in their respective businesses, solid and experienced management teams and, in our opinion, are very undervalued by the stock market. We continue to avoid the energy and commodity markets as we continue to have no idea where the underlying commodity prices will move to and we will also avoid the banking and housebuilding sectors for the reasons outlined above (and last month).

Who knows whether we have already seen the lows for the stock market on March 17th with the collapse of Bear Stearns, but we remain of the very strong belief that our portfolio represents great value that we haven’t seen for many years and are doubly reassured by the fact that our top 4 holdings (representing 45% of the fund) are heavily shorted at present by hedge funds and proprietary trading desks.

Chris Broadhurst
CEO