The Sceptre UK Fund was up by 4.4% in November which compares with the FT All Share index being up by 2.9% in the month. This brings the Sceptre UK Fund to be just ahead of the index by 1.8% for the Quarter to date.

We sold one holding and bought another in the month which leaves the fund with 15 core holdings and with the top 5 stocks (still) making up over 50% of the fund. Of these top 5 stocks, the largest holding – a retailer – was up 15%, the second largest holding (Leisure sector) was up by 10% and the third largest holding (Media) was up by 12%. Also, our insurance stock, the 6th largest holding was up by 16% in the month as the threat of further hurricanes recede and the focus moves to higher renewal rates for 2006.

These gains were partially offset by declines in 3 smaller market capitalisation stocks (which are also much smaller weightings in the portfolio) declining by about 10%. Whilst this is disappointing, we are convinced there is no reason to change our valuation of these stocks, it is purely an example of the major problem of investing in small cap names. These less liquid stocks will be small in number within the portfolio and will be kept small in position size so that their short term individual performance will not have a major impact on the overall fund performance. Over time their cash flow generation will be recognised and the market valuations will increase.

The stock we sold was a £500m Engineering stock which has performed very well over the past 6 months but its valuation (along with many of the other high quality UK engineering mid-cap companies) has increased to such a level that it is now discounting its growth of 12% pa to continue for another 5+ years. Whilst this may well happen, we believe the potential for a “slip-up” versus our conservative valuation and approach made closing the position the sensible decision.

The addition to the portfolio is a pan-European manufacturer and market leader in its sector which has grown operating profits at an average rate of 10% pa over the past 5 years. We have bought this company at about 10x our expected cashflow for this year and fully expect the growth to continue, through organic growth of ~5% pa and small acquisitions adding further growth. A key positive is that the management team (who we met in November) has been in place for over 15 years – they are consistent in their approach and continue to hold significant shares in the business themselves.

Chris Broadhurst
CEO