The Sceptre UK Fund was up 3.2% net in March (3.9% before fees) compared to 3.1% for the FT All Share Index and is up 7.7% in the Quarter (8.4% before fees) versus the index performance of 7.1%.

The portfolio remains very concentrated with 10 stocks making up 76% and 15 stocks 95% - the biggest holding is just under a 15% weighting. The monthly performance was spread across the portfolio but 2 stocks stood out, with our Lloyds Insurance Underwriter up almost 20% and our Support Services stock up 10% - in addition, our 3 FTSE 100 stocks were all up by between 7% and 10%. We had quite a busy month on the trading front, adding 4 new names and closing 2 positions, as well as adding to 3 positions on stock price weakness during the period.

We continue to find our best ideas in the mid-cap area and are not really seeing any valuable buying opportunities in the FTSE 100 outside of our 3 existing FTSE stocks which make up almost 20% of the portfolio.

The performance of the FTSE 100 has been heavily influenced by the Natural Resources sector, not only the big oil stocks of BP and Shell, but also the mining stocks Rio Tinto, Xstrata, BHP Billiton, Antofagasta, Anglo American and Kazakhmys – both Xstrata and Kazakhmys are up by over 30% ytd. We have no idea just how long this sector will continue to outperform the index but many analysts, fund managers and hedge funds remain very confident of further progress. We will not be getting involved and remain fairly sceptical when so many headlines are telling us of “multi-year and all time highs in both precious and base metal prices. Platinum is at an all time high, gold at a 25 year high, silver at a 22 year high (+67% in 6 mths), copper has hit its “6th all time high in a row”, zinc at an all time high and oil above $67.

There is now an estimated $80bn in funds tracking the various commodity indexes compared to just $15bn 3 years ago and the Goldman Sachs Commodity Index has tripled in that period. So it is not just the effect of the world economy coming out of recession in 2002/3 that has fuelled commodity price growth.

A similar pattern has occurred in Emerging Markets with net private capital flows estimated to be $360bn this year compared to the record of $400bn last year and Portfolio net direct investments in Emerging Markets estimated to be $170bn – up from $150bn in 2005. Whilst bond spreads on Emerging Market debt are at record low levels compared to US Treasury Bonds and both Iceland and New Zealand are facing significant falls in their currencies.

We just don’t know what the future direction of commodity prices or global currencies is going to be and, thankfully, we do not have to invest in any companies which are significantly affected by these factors. The world markets appear to be a very happy and orderly place whilst new highs are being achieved – perhaps it will be different if/when they peak.

Many of our companies have been affected by the increase in power and fuel prices and it has been a major focus for us to determine the magnitude of this and just what proportion can be passed on to the end clients. Whilst the rises are not insignificant, we do not believe they will pose big problems to the companies in the fund. We remain confident that we hold a portfolio of under priced companies which are (or will soon become) very cash generative relative to their stock market valuations.

If you have any questions on the performance over the Quarter or on the Sceptre UK Fund, please let us know,

Chris Broadhurst
CEO