The Sceptre UK fund was up 0.2% in July compared to a fall of 3.7% for the FT All Share index. This was the first significant outperformance of the fund versus the index in several months and comes at a time when, we believe, our portfolio is the most undervalued that it has ever been with stock market prices discounting “disaster scenarios” for the economy and our companies.

Whilst retailing, housebuilding and other consumer facing areas are seeing a dramatic slowing in demand the stock market has been discounting this financial turmoil for about a year and many stocks have seen their valuation fall by as much as 90% from the highs of early 2007. Whilst most stocks were probably overvalued at their highs, the change has been spread broadly across sectors with many “good” stocks being hit by similar amounts to those companies that have less protected business models and more highly leveraged balance sheets. There is little doubt that some companies will either go bust or will have to attempt “emergency” rights issues or debt for equity swaps at low share price levels as their managements have failed to foresee the rapid decline in business and its immediate effect on their post interest cashflow.

Recessions are a part of economic history and the doom and gloom that surrounds their eventual arrival is often the time that equities are starting to recover their values as investors start to see more clearly the potential recovery phase. Those companies which are best placed (business model and balance sheet) to capitalise will see their share prices start to reflect the dramatic undervaluation. In many cases this revaluation will involve the shares increasing in value by a factor of 3 or 4 times over the following 12 – 24 months.

This is a very exciting time for us as we have been patiently waiting as valuations have tumbled and we have now been fully invested for about 6 months and have spent most of 2008 moving weightings towards companies with higher degrees of undervaluation and in some cases into higher quality business which were previously not offering sufficient discount to fair value. The fact that some businesses have their cycles at slightly different timing to others will also give further opportunities for us to add value when the recovery starts to be reflected in share prices. July has been a particularly busy time for us with almost half of the portfolio reporting results (which have been quite satisfactory versus our expectations) and the stock market has continued to be very volatile reflecting the ongoing market uncertainty and the high levels of short positions in individual stocks. It has not been unusual to see companies announce results and share prices down by 10% (or more) and then end the day unchanged or up by 5%+ as the market digests the results and traders change views as the market momentum changes.

As we have said for the last 6 months, we do not know if this is the bottom of the market but we are very sure that the companies within our own portfolio (and many others) are trading at exceptionally low valuations that we have not seen since the inception of the fund and this offers a tremendous opportunity to make great returns over the next 12 – 24 months and longer.

Chris Broadhurst