The Sceptre UK Fund was up 1.0% in June (net of fees) versus a 1.7% rise in the FT All Share index.

The market stabilised in June following the falls in May and we were much less active in our trading as a result of this (trading in only 4 stocks). However, we were still able to move a little more money into 2 of our holdings that we believe offer more upside for the fund relative to other holdings. The biggest faller in the portfolio was our Lloyd’s Insurance Underwriter which was down by over 6% and is now trading at about 6x this year’s expected cashflow and has a 5%+ dividend yield.

Our method of valuing stocks concentrates on 3 areas, it starts with the business model, evaluates the management and then prices our own (conservative) expectation of the future cashflows that the company will generate.

Business Model

We prefer companies that are market leaders or niche players where barriers to entry are high – we particularly like those companies that have real pricing power and that can pass on rises in input costs to their customers – it is always reassuring to see flat or rising operating margins.

Management

Has the management been in place for a considerable time and do they evaluate capital expenditure on a rigorous ROCE basis? These 2 factors will frequently show that the management strategy is consistent and that they understand the relative value of debt, cash and equity. For example, if they make acquisitions, do they pay considerable premiums to book value and do they use debt or equity to pay for it? Are they willing to return excess cash to shareholders via dividends and/or share buybacks? In summary, how does the management add value?

Valuation

We look at the current business, its competitors, the overall market for its products and its market share. Then we attempt to conservatively forecast the future cashflows taking into account expected capital expenditure, interest payments and tax but before dividend payments, share buybacks or expansion capital expenditure.

Sceptre Investment Management is a value based investor which means (for us) that we invest in companies that will generate forecastable streams of cashflow that may or may not be growing over time. We will pay more for certainty and also pay more for growing cashflows. Our own niche is in finding those companies that the stock market is under valuing and weighting them according to risk and upside potential within the fund.

Portfolio

The Sceptre UK Fund is made up of 17 stocks but 6 stocks make up 50% of the portfolio – on a current valuation basis the portfolio has a weighted average Price to Cashflow of 9.5x and a weighted growth rate of 15%. This means that the portfolio is generating a real cash yield of over 10% and this cashflow is expected to grow at about 15% in the next year.

Please let us know if you have any questions on the fund,

Chris Broadhurst
CEO