The Sceptre UK Fund was down 5.2% in May which is the worst month’s performance in the history of the fund and is only partially explained by the fact that the FT All Share index was also down by a similar amount. Many of our stocks fell on no news (as did many in the index) – our Lloyd’s Insurance Underwriter fell by 8% in the month despite indicating better underwriting results. Some of our other mid-cap names had similar price moves.

Whilst the price performance is a short term disappointment, it has presented us with some exceptional opportunities to add value to the portfolio in a very volatile month. As share prices fell we were actively adding to what we feel are great value positions and funding these purchases with sales from stocks that have (in our view) relatively less upside to our calculation of “fair value”. In May we traded 14 times for the fund which compares to April when we only traded twice.

We started the month with over 6% cash and ended it almost fully invested with a net addition of one stock to the very concentrated portfolio – the 2 major changes to the portfolio were:

(i) The addition of a new holding – a £4bn market cap. technology stock which has a 3.8% dividend and is buying back its own shares. It trades at about 12x this year’s free cashflow (before dividend/share buy-backs) and has an 18%+ growth rate. When we started buying this stock it was already 7% below its May high and as it continued to fall, we continued to buy, averaging a gross cost of 13% below its May high. This gives us an expected uplift to our calculation of “fair value” of 79% - compared to about a 39% upside from its recent high.

(ii) Increasing the weight of an existing manufacturing stock by an additional 1% weighting after it fell 5% and adding a further 1% weighting when it had fallen 12.5% from the end of April price. This stock now trades at about 10x its free cashflow and has grown operating profits at 14% CAGR over the past 10 years.

It is always easier to look back and evaluate when was the best time to establish a position or add to an existing position but we try to balance our own estimation of the upside in a particular stock price (to our “fair value”) with its weighting in the portfolio. It is as if we are moving money from “good” investments to “very good” investments and adding value for the medium/long term.

This is clearly not an exact science but, by continuing to re-evaluate the upside potential in our concentrated stock portfolio, we hope to use the market volatility to add value as we are presented with unusually good buying opportunities.

We hope that this short summary explains at least some of what we have been doing in May however please let us know if you require more detail.

Chris Broadhurst
CEO