The Sceptre UK Fund was down by just over 1% in June which compares to the FT All Share index being down by 3.6% in the month. This brings the Fund’s performance in the first half of the year to +41.3% compared to the index being down 1.7% year to date – an outperformance of 43%. This is clearly a big increase in the Fund’s NAV but, we believe that there is a good deal more upside before we reach our own calculation of “fair value” for the Fund’s holdings. For reference the underlying securities in the portfolio have a book value of around £1,000 – so we continue to see a price-to-book on the whole portfolio of 1.05 which is significantly lower than the historical returns of our investments would justify.

There is a definite polarisation of views between those expecting the market to recover and those expecting a re-testing of the recent lows – we have consistently said that we are no experts in short term market direction and that our “market view” is really a deduction of the individual stock valuations that we encounter. We said in October/November last year that we had never seen valuations so “cheap” and the Fund bottomed in late November, whilst we have seen a small reduction in the overall size of short positions but have not yet seen a significant reduction in the massive cash and short maturity bond funds as potential equity investors remain nervously on the side lines.

We will leave discussion on the timing of market moves to “market strategists” but economic theory (and common sense) tells us that unemployment, GDP and inflation data are all lagging indicators and share prices will move to discount a recovery before any of the economic data will endorse it. We are secure in the knowledge that we own extremely well capitalised companies that are market leaders (some global and others within the UK). These companies have cut costs, raised efficiencies and many have had competitors go bankrupt so are really best placed to take full advantage of the recovery and increase market share as a result.

It is particularly exciting to hold a portfolio of 15 excellently managed, market leading/niche companies that are priced at such low valuations by the market – opportunities of this scale rarely happen and we don’t see them as a “risky” investment but as a solid, medium term conservative investment – but holding lots of cash yielding almost nothing in this monetary environment we do consider has risk attached that the market is only slowly coming round to understand.

Chris Broadhurst