The Sceptre UK Fund was down by 14.8% in June (the FT All Share index was down 7.4%) which was our worst month since inception and continues the sell-off which started almost a year ago. Three of our holdings declined by almost a third in the month and, whilst none are in the retailing sector, they are exposed to a retail slowdown to a certain degree – although not to the extent which the market is implying in this “disaster scenario” for the valuation. These stocks now have yields of between 6% and 10% which we expected to be paid and have comfortable debt levels, solid cashflow and long term, experienced management teams and are in no way speculative or highly leveraged companies in trouble.

We continue to avoid the banking sector where we cannot be confident of their stated book values and have (until early July) also avoided the house builders. We had always said (see our article from October 2007 at the link below) that it would be sensible to await the first land bank writedowns before investing and we patiently watched until Taylor Wimpey wrote down its own land bank by about 15% last week before establishing a small position in (another much less leveraged) house builder. It is our view that whilst the trading names will survive there is no certainty that the current shareholders of some of the more heavily leveraged builders will retain ownership (without significant dilution) of the future profit streams from these businesses. Identifying the correct builder to invest in is something we have dedicated a large amount of work towards over the last year.

It appears that “investment themes” are being applied across sectors with little regard for individual companies’ fundamentals or prospects and “good” companies are being sold alongside “bad” companies. This is a phenomenon that occurs at both the top of the market (general buying to “overpriced” levels) and at the market bottom when the baby gets thrown out with the bathwater. Our response is to move money from our more resiliently priced holdings into these overly sold areas and to patiently await the turnaround – as frustrating as that currently feels.

The Banks continue to show that their own knowledge of the value of their investments is perhaps little better than we can glean from public available data and that their “good” returns have been derived more from the leverage of mediocre returns than from solid investing. In many cases their book values certainly bear little relation to the current liquidation values and most of those banks will have to raise more capital and face lower expected future returns. We do not see this sector offering us any investment opportunities at present.

Whilst we have continually explained why we do not invest in the commodity sector it has been almost a constant headwind to our own relative performance as more companies list their shares on the London market and prices have increased so has the size of the relative influence on the market performance. The mining sector now accounts for over 12% of the FTSE 100 index and the oil sector accounts for over 18% - whilst the index is down 20% from its highs in October 2007, without these 2 sectors it would have been down by approximately 27% in the same period. We have written a short piece on the Changing Face of the UK Index which can be downloaded from http://www.sceptrefunds.co.uk/articles/.

We continue to be very positive about the prospects for the Fund and, as frustrating as this is, we will patiently await the turn in the cycle and be well placed to take full advantage of it. We believe our fund has structural benefits versus our peers at times like these – we are unleveraged and due to our shareholder base will not be forced into selling holdings at depressed valuations by redemptions from fund holders.

Chris Broadhurst