The Sceptre UK Fund was down by 5.9% in January the same as the fall of 5.9% in the FT All Share index.

Although the fund was down in January, it has had a good overall 3 month performance of +3.3% whilst the All-share index has fallen by -4.8% over the same period, an outperformance by the fund of +8.1%. Meanwhile the FT SmallCap index is down a further -12.7% over the same period, continuing its underperformance. We have never suggested that timing the bottom of the market or of an individual stock price is our strength but have stressed over the past few months that most stock prices are discounting an extremely bleak future and, in many cases, are predicting certain companies going bankrupt. It remains our view that economies are cyclical and that market forces (supply destruction) and aggressive policy actions such as historically low interest rates and other methods of stimulating the economy will at some stage bring an end to the recession and company profits will rebound. The greatest importance remains investing in companies with good margins of safety and where the risk of dilution or permanent capital impairment is low.

As we have said before, the constant flow of bad economic news will continue for a long period after the stock market has bottomed and there currently is nothing but bad news in the daily financial press. It is therefore encouraging to see the share prices of certain companies and sectors actually move higher on ‘negative’ news indicating that perhaps in many cases the bad news is already discounted in the market. It remains very clear to us that analysts are just as capable of “drawing straight lines” at the bottom of the market as the top.

We believe that the most heavily discounted stocks are those in the more cyclical businesses and have been adding to our holdings over the past few months where we judge there is little or no chance of bankruptcy and there are sufficient net tangible assets to give solid support to the share price. These parameters sound simplistic but they are complementary to our criteria to invest in niche or market leading companies that have underpriced real cashflows and experienced shareholder friendly management.

The portfolio is very focussed containing just 15 names (the top 8 stocks make up over 75% of the portfolio) but is spread across sectors and historical volatility has been similar to that of the index – trailing 90 day volatility is currently about 40%.

With many investors having significantly reduced their equity exposure over the past 12–18 months and significant short positions still in existence, we believe that when market commentators agree that equity markets have bottomed, the opportunities for the greatest upside will have already have passed.

Chris Broadhurst