The Sceptre UK Fund was up by 9.8% in August which compares to a rise of 4.4% for the FT All Share index. Since mid-July we have seen a peak in commodity prices, strengthening US dollar and improved performance from equities which has been even more pronounced within the value stocks that form our existing and potential investments. Whilst it is by no means certain, it appears that the long awaited (on our part at least) bursting of the commodity price bubble has started and this is not just a short term reversal, but time will tell.

Our 3 top holdings which made up about 40% of the portfolio at the start of August appreciated by 25%, 17% and 11% during the month and hence formed the basis of the strong performance. We run a very concentrated portfolio at all times and it is this that really sets us apart from the index and broader “active” portfolios. There are few restrictions on the size of the weightings of stocks and we will tend to have the highest weightings in those companies whose share price has the highest potential upside to our calculation of “fair value”. This concentration of money into fewer holdings adds volatility to the portfolio and will lead to periods of underperformance but, in the medium to long term, the value of companies with strong, real cashflows, excellent management teams (making “shareholder friendly” decisions) priced at cheap levels will allow us to outperform the index.

We have made no secret of our views on the commodity price bubble that has been inflating over the past 3+ years and the effect that this has had on the index performance over the period. It has been very similar in nature to other bubbles, including the recent TMT bubble, with many respected analysts and fund managers offering more and more reasons for continued commodity price increases which have (until recently) been self fulfilling. The bursting of the commodity bubble (if it continues) will take at least 18 - 24 months and will not be in a straight line but will form a very solid backdrop to a general under performance for the FTSE 100 index over the period.

Our value-led investment strategy has given us a portfolio of extremely cheap, well-run companies that have strong balance sheets and will be best able to capitalise on the opportunities that will arise as the global economies start to recover from the economic downturn. It is a very exciting time for us as there are many attractive potential investments available in addition to those already in the portfolio and we are always willing to move money from an existing holding to a new investment that offers even more upside for a similar level of risk/diversification.

Within the fund, our ~15 holdings all have our own version of a “fair value” or target price. Currently this weighted fair value gives the portfolio greater than 100% upside during the economic recovery which could be reasonably expected to happen within the next 3 years.

If you would like to have more details on the portfolio or on our thoughts, please let us know.

Chris Broadhurst