The Sceptre UK Fund was down by 6.8% in November compared to a fall of 5.0% in the FT All Share index. Whilst we do not want to seek excuses for an underperformance, we would point out that the FT All Share index rallied by almost 5% in the last 3 days of the month – this rally was not as strong within our own portfolio and we moved from a position of outperformance to end the month worse than the index.

November was an unusually volatile month in which many stocks have fallen by 10% to 20% and we are at last starting to see some value creep back into the market in certain areas. The small cap sector has fallen by the most but we have also seen significant falls in the FTSE 250 or “mid-cap” sector: FTSE Mining sector +2.8%; FTSE 100 -4.3%; FTSE All Share -5.0%; FTSE 250 -7.9%; FTSE Small cap -11.1%

As you can see form the above table, the main are of strength continues to be the mining stocks with an unsolicited bid for Rio Tinto and the consequential expectations about “mining consolidation”.

Our portfolio is spread across market capitalisations from about £100m to £11bn so we do not fall exactly in any of the indices above, instead we concentrate our investments into companies which are highly cash generative with no/low leverage and have extremely experienced (and shareholder friendly) management teams. Whilst we have no strong view on whether the UK and Europe will experience more than just a slowing of economic activity over the next 12 months, we strongly believe that our companies are extremely well placed to weather the business cycle and will continue to create value for shareholders.

Indeed, the current market is discounting a substantial slowdown in certain sectors (mainly banking, construction and anything retail facing) which has taken valuations to levels not seen in many years and (in some cases never before). We have spent almost 10% of the fund in establishing a new holding and adding to 4 existing holdings during the month – this has taken our cash weighting down from 16.5% to 7.0% and we now have several potential new holdings firmly on the radar but still at valuations above our target (buy) prices.

It doesn’t, at first reading, appear logical for us to be so enthusiastic about such a poor absolute performance in November but we are fortunate to have built up a cash weighting over the last 12 months and have now started to put some of this money to work at (what we think) are “cheap” valuations. In our experience, markets tend to overshoot on the upside and on the downside and “good” companies get sold-off along with the “less good” companies. This all creates the best environment for us to find suitable candidates for the fund at great prices and, whilst we have no gauge for the timing of the market, we have long horizons on our individual company valuations and know we have been buying excellent companies cheaply.

As always, please let us know if you would like further details on our thoughts and activities.

Chris Broadhurst