The Sceptre UK Fund was down by 18.0% in October and the FT All Share index was down by 12.1% in the month (within which the FTSE250 was down 20.4% and SmallCap down 21.0% whilst the FTSE100 was down only 10.7%).

The continuing poor performance of equities, especially in smaller capitalised companies is frustrating, but the unprecedented volatility has continued to provide exceptional investment opportunities to us as investors. During October we bought or sold shares in over half our holdings (8 companies) as we have increased weightings in companies that we believe have greater upside than others in the fund. This is reflected in the fact that we end October with a Book Value per share in the fund of £805 which is up 20% since the end of September (it should be remembered that many of our investments earn significant returns on capital and book and we believe should trade at multiples of book rather than at a discount).

We also closed our position in BSkyB which, although trading with a 60-80% upside to our calculation of “fair value”, we have use to fund additional weighting in a holding that we consider has the potential to increase 4-fold to our “fair value” over the next few years. The recent 1½% cut in UK interest rates (with possibly further cuts to come) will do much to “kick start” the economy and, as market volatility subsides and interbank lending rates decline, we expect to see confidence return. We cannot predict precisely when economic recovery will happen, but the stock market continues to discount severe economic recession and in many cases discounts very high probabilities that certain companies will fail whilst in many cases such low valuations are unjustified under realistic scenarios.

As always, we do not want to get involved in trying to correctly time the market or give to much focus to macroeconomic data which can be of little importance to an individual companies long-term valuation, but we can confidently say that in our view, equities have not been this cheap for decades.

I would draw your attention to our recently written article extending the mathematical analysis of the Dow-Jones “fair value” by Benjamin Graham: www.sceptrefunds.co.uk/articles

Chris Broadhurst