The Sceptre UK Fund was down 18.9% in September which compares to down 13.4% for the FT All Share index. Over the 3rd quarter the fund was down by 10.8% compared to a fall of 13.0% in the FT All Share index.

September was a very busy month for us as we continued to re-weight our holdings in a very volatile market. We sold part of our holding in BskyB and increased our weighting in 2 technology stocks and 3 consumer stocks in the portfolio. We also sold all our holding in housebuilder Bellway which had appreciated by over 80% in the 8 week holding period. Whilst this may seem to be more like “trading” than investing we have a good long term view on those housebuilders with low debt levels and modest landbanks but the near doubling of the shareprice is failing to take account of the massive reduction in new home sales volumes (>50%) and our expectations that house prices will continue to fall for at least another 12+ months – as they follow a similar path to prices in previous housing corrections. We added a small holding in a UK stockbroker that is now trading at about 2x last year’s free cashflow, has a large cash balance and a very solid fund management operation generating good returns.

Our portfolio now consists of 15 companies with the top 4 holdings (making up almost 50%) being 2 global companies (1 technology and 1 consumer) and 2 UK facing companies (both consumer related), we continue to avoid commodity based businesses (where we have no expertise in forecasting the underlying commodity price) and banks (where we continue to be ignorant of their “true” book values).

All our companies have low or no debt levels, very experienced management teams and have dominant (or niche) market positions which will provide insulation from the worst of the expected recession and allow them to recover faster and stronger than their competitors when the upturn starts.

The most recent events in the financial markets are extreme and increasingly targeted to lower “true” borrowing costs, we believe the equity markets are already discounting an extremely poor economic outlook and that, once the banking system is stabilised, the recovery will follow. The past 16 months has been painful as a long only value investor but we continue to find excellent businesses at exceptionally cheap prices and know that when confidence returns our portfolio will provide outstanding results.

If you would like to have more details on the portfolio or on our thoughts, please let us know.

Chris Broadhurst