The Sceptre UK Fund was up by 9.0% in December which compares to a rise of 3.5% for the FT All Share index. For the final Quarter the fund was down by 10.1% and the FT All Share was down by 11.0% (although mid-cap and smaller companies fared far worse with the FTSE250 down 19% and the FTSE Smallcap down 28%).

The months of September and October were big down months for both the fund and the markets but the recent recovery is encouraging in a stock market environment which values many companies at exceptionally low levels and we believe more than discounts the coming economic downturn. In the second half of 2008 there was an unually large corelation between value and growth stocks in the S&P 500 index as massive mutual fund selling pushed most shares lower. This has given us, what we believe is, the biggest opportunity of our careers to buy stakes in great companies at fractions of their true long term value.

Whilst government bond yields have been pushed to all time lows in a "flight to quality" and with a fear of deflation we believe that the massive capital spending combined with record low interest rates and central bank expansion of the money supply will more likely lead to future core inflation rather than deflation. It was less than a year ago that many worried unduly about inflation which was really a result of the commodity price bubble and the ongoing deflating of that bubble should not now be wrongly put down to structual monetary deflation.

Economic news continues to be poor, short positions are near to recent highs, but unit trust sales have slowed and December saw net unit trust buying. Historically stock markets tend to bottom about half way into a recession and, with the US officially having entered a recession in December 2007, we could expect another 12 months of poor economic data but rising markets if this is turns out to be a 24 month downturn.

This year we have only changed 4 stocks in the portfolio and end the year with 15 names but have a much higher weighting in cyclical stocks and those that have been particularly heavily sold by off the market. In all cases we believe that their market position and cashflows will allow them to come through the recession and in many cases emerge with fewer competitors as these fall by the wayside.

The price-to-book value of the fund is just below 0.7x times and our conservative valuation appraisals of the companies we own leads us to believe that the fund has a current "fair value" over 3x its current market valuation and, whilst there are no guarantees, we are very optimistic that this will be realised over the medium term.

We wish you all a healthy and prosperous 2009,

Chris Broadhurst