The Sceptre UK Fund was up 0.7% in November which compares to a decline of 2.3% in the FT All Share index.

A small rise and some outperformance is very welcome but the intra day market volatility continues to be very high as lack of confidence and low liquidity drive share prices up and down. This is particularly visible in smaller capitalised companies – where the FTSE SmallCap was down a further 9.4% in November, extending its decline to 51% YTD. Whilst we are not traders, this volatility continues to present buying opportunities for us and we moved about 8% of the portfolio into holdings that we believe offer us much more upside to our calculation of “fair value”.

In this process we have also initiated a very small position in a new stock so that we now have 15 holdings in the fund with the top 4 holdings making up 54% of the portfolio. These holdings all have very manageable debt levels (or net cash positions) and plenty of headroom to survive the current and expected economic downturn over the coming months. So many stocks that we hold appear to be discounting such severe market conditions that there seems to be questions about them continuing as “going concerns”. We know that many of their competitors are much less well positioned in terms of balance sheet, market position and business model and will be the first companies to fail leaving a much less competitive market for our companies to expand into when the upturn finally comes.

We continue to see companies trading at very low valuations and fully expect that earnings and dividends will continue to fall over the coming months. However, it is just the right stage of the cycle to start to anticipate how the dramatic interest rate reductions, bank recapitalisations and tax reductions will feed through to the economy over the next year and what that will do to the outlook for corporate earnings.

The timing of the upturn is unknown but we know that on a medium term outlook, stock prices are very cheap and have not been cheaper in decades. Buying market leading companies with low debt and for often less than their net tangible assets is an unusual situation which is rarely offered by the market. The stock market will anticipate the economic upturn – just as it anticipated the downturn.

Chris Broadhurst