Smaller companies staged a dramatic recovery in February as investors sought bargains in stocks and sectors that had retreated in previous months. Oil related stocks led the gain as the price of a barrel of oil reached record highs. Mining companies also advanced on the back of advancing commodity prices and bid activity. As widely anticipated, the Bank of England cut UK interest rates by 0.25% to 5.25%, prompted by falling house prices and weakening economic data.The Fund returned 12.44% over the month, compared to a sector average return of 5.00%. After changing the pricing basis of the Fund from offer to bid during January to protect existing investors from the dilutive impact of dealing in the Fund, we reversed the pricing basis in February, which accounts for some of the dramatic outperformance over the month.However, even after taking account of the change in pricing basis, the Fund still outperformed the sector average on the back of positive stock selection in a recovering market. Our holding in Dominos Pizza recovered in February after its strong results demonstrated the soundness of its business model even in a challenging economic environment.Likewise, online fashion retailer ASOS also gained after posting good earnings results. Holdings in oil and mining stocks also added to returns on the back of surging commodities prices, including First Quantum Minerals, Expro International and Aquarius Platinum.We took advantage of widespread market volatility to add to some favoured long-term stock positions with excellent business models entailing robust and repeatable earnings. These included powered access rental firm Lavendon Group, retail utility distributor Telecom Plus, specialist polymer manufacturer Victrex and online clothing retailer ASOS. We also added to PayPoint, which benefits from a market dominant position, post office closures and growing volumes and margins.
Although the UK equity market is generally underpinned by robust corporate profitability, in the short-term smaller companies remain susceptible to bouts of volatility and risk aversion. However, as they also tend to be more exposed to the domestic economy than their larger peers, the prospect of lower interest rates has the potential to trigger a wider market recovery later in the year.