The Sceptre UK Fund was up by 28.0% in April which compares to a rise of 9.5% for the FT All Share index in the month. After the rise of 16.9% in March the recovery of the fund from its low last November is happening very quickly and it is now up by 44.0% ytd compared to a small decline for the FT All Share of 1.6%, which gives an out performance of over 45% ytd.

Whilst the fund has risen 77% from its low in November we still have about 30% further to go before we reach the previous high and, we believe that the fund has 100%+ more upside to get to our own calculation of its “fair value”. By comparison, the FT All share index has risen by 16.3% since its low in March and has to rise a further 60% to get back to its 2007 high.

The rise in the fund’s value was broad based across our 15 stock portfolio (as was the case in March) with 4 of the top 6 holdings rising by more than 20% and only 1 stock in the whole portfolio declining in the month. We replaced 2 stocks in the portfolio with a leading engineering company and a global hotel company which was trading at about 33% of its net tangible assets. The engineering firm in question is world-leading and has averaged over 20% return on equity without use of borrowings for the last 25 years – we were able to acquire our stake at 1.2x net assets. Throughout the past 12+ months, whilst being fully invested, we have consistently applied our rigorous investment process to value businesses and been disciplined in reweighting our holdings according to our own estimates of their potential upside. In our opinion, this has resulted in the fund being able to acquire stakes in outstanding or niche companies at a fraction of their true value whilst remaining conservative and only investing where there is little or no chance of bankruptcy – half our companies have net cash on their balance sheets.

We believe that the huge uncertainties surrounding the world’s financial markets caused widespread fear and panic amongst investors which, compounded by short selling, resulted in many stock market valuations discounting near doomsday scenarios for businesses. Reduction in commodity prices, operating efficiency improvements, together with the elimination of weak competitors in the many industries which have avoided government interference will begin to drive recovery. Government intervention and the aggressive monetary actions that have been put in place over the last 6 months will result in probable inflation issues and we believe that we are seeing the first stages of the stock markets anticipating both that recovery and the unattractive outlook for holding cash.

In November we said “...stock prices are very cheap and have not been cheaper in decades. Buying market leading companies with low debt and for often less than their net tangible assets is an unusual situation which is rarely offered by the market.” Whilst a number of cases of extreme undervaluation have now partly recovered – there remain many situations where we find large margins of safety and in higher quality businesses than have been available at these low valuations for many years and we remain fully invested and very optimistic.

If you would like to know more about the fund’s current portfolio, please let us know.

Chris Broadhurst