Following a rise of 16.9% in March and 28.0% in April, a small decline of 0.8% in May should be put into perspective despite underperforming the month’s rise of 3.7% for the FT All Share index. Since December 31st the Sceptre UK Fund has risen 42.9% compared to a rise in the FT All Share index of just 2.0%.

May was very quiet for us in terms of transactions but we continued to trawl through our universe of companies to compare valuations of other stocks with those within our fund and remain confident that we hold a group of excellently managed companies operating in sector leading (or niche) positions, with solid balance sheets and valuations that, in our view, are on average about 50% of “fair value”. As we have said many times over the past few months, we cannot predict when a market and economic recovery will occur but we can predict that it will happen and that, whilst analysts are very prone to draw straight lines at the top and the bottom of the cycle, we believe in the cycle reoccurring and presenting us with these periodic buying opportunities.

The individual stock movements within the fund were very mixed in May with two engineering companies rising and two falling by double digit percentages and both of our technology stocks down but, as stated above, a period of consolidation at these higher levels should not be unexpected after such strong gains. Since the end of 2007 the fund has outperformed the FT All Share index (TR) by 12.8% annualised and 2.7% per annum since inception in 2005 after all fees.

Economists and the financial press continue to debate whether the economy has turned whilst major world equity markets have risen over 30% from their March lows. We have moved from hearing economists predicting deflation and deep recession through stabilisation and now to erratic signs of recovery – uncertainty should be expected at economic turning points. No market recovery can continue in a straight line without any consolidation and continuing volatility is making it even more difficult for observers to conclude whether equities are “safe” once more. The senior management within most companies we follow are also uncertain about the outlook and continue to make cuts in staff and costs but, as their own visibility was poor as the economy turned down, it is equally poor now and they may fail to see any upturn coming. When it does come, many companies will be operating in a very lean and cost efficient manner and profitability will be significantly enhanced for a period. We continue to be invested in those leading companies that are best placed to take full advantage of the economic upturn when it happens.

As always if you have any questions, please feel free to contact us,

Chris Broadhurst