March saw the NAV of the fund fall by 1.8%, with movements in two holdings responsible for 3.2% of the downward change in the NAV. In the meantime the market fully recovered from the sell-off and pick up in volatility at the end of last month with the FT All-share up 2.7%. For the first quarter the fund was down 0.9% with the FT All Share index up by 0.7% over the same period.

The two large individual moves in the portfolio were the result of negatively received trading statements by the market and we will address each situation separately.

One of our larger holdings, an industrial group operating 40 factories across Europe announced that despite strong trading and sales performance it was experiencing continuing material cost pressures, this was not new information as far as we were concerned. In the past management have been able to successfully raise their prices in response to input cost increases as a result of the niche products and close customer relationships the company maintains. We continue to believe that the company is an extremely well-managed and financially strong operator and is an under priced asset. It has a dominant position across Europe and has consistently generated high returns on capital employed throughout the economic cycle. The senior management team of Chairman, CEO and FD has been in place for almost 20 years and has grown the business consistently over this time via organic growth and small strategic acquisitions with eps growing by over 14% CAGR over the past 7 years. The business remains as “cheaply” priced as it was when we invested 18 months ago, albeit that it has grown over this time and continued to show its pricing power. It is in an “unfashionable” sector but has excellent cash generation, solid growth, a highly experienced management team and a dominant market position.

Following further corporate developments (but no change in fundamentals) within another of our holdings and an increasing pessimistic outlook on the industry in which it operates, the market continues to mark down our investment in what we consider to be a well-run and sound business. It continues to achieve very good returns on equity and is now trading at a level which discounts an extremely pessimistic scenario many years into the future – we have increased our holding and lowered our net cost, in the belief that the business justifies a much higher valuation than currently offered in the market.

We run a portfolio which consists of approximately 15 stocks and our investment process is focussed on finding under priced but excellent businesses run by experienced (and shareholder friendly) management teams. Over time this process has shown consistently good results but, due to the concentrated nature of the fund, our portfolio can be more volatile than the market. Having outperformed the market in February, we gave back that outperformance (and a little more) in March. Our investment process is very robust and our calculations of how much the stock market is under valuing our holdings contain a large margin of error which allows us to sleep at night.

Short term fluctuations in stock prices create opportunities for us (both buying and selling) and we therefore welcome them, the market remains very focussed on the more speculative areas of private equity bids and rumoured bids on stocks that we believe are already fully priced. It is a similar situation that we have seen many times before.

The fund ended March with a higher cash weighting than we would have wanted (17%) and we continue to search for potential new investment opportunities in the knowledge that patience will be rewarded and the fact that the market will throw out these opportunities over time – even if we have no idea of just when that may be!

As always, if you have any questions on our approach or performance, please let us know.

Chris Broadhurst
CEO