Fund Objective

The fund's investment objective is to achieve capital growth by investing in UK smaller companies.

View on Past Performance

The equity market turmoil reached a new level during the quarter given mounting concerns about the credit crunch and weakness in the US and UK economies. Share prices slumped across the market, with smaller companies suffering most given their perceived exposure to the domestic economy.This continued to create a difficult backdrop for the fund, although our holdings held up relatively well overall. Stocks such as Domino Printing Sciences, Games Workshop and LMS Capital, for example, all posted gains and, accordingly, drove the fund's outperformance.There were also strong returns from takeover targets Chrysalis and Nestor Healthcare, although both bids have since been rejected.

Future Expectations

The fact that corporate activity is still in evidence is encouraging for the fund, but we have seen a marked reduction in all areas, from IPOs to private equity. In addition, as we have seen with Nestor and Chrysalis, there has been a higher incidence of rejected bids as valuations are now seen to be too low.This may lead to a greater prevalence of paper-to-paper deals as the year proceeds. As far as the fund is concerned, it is still possible to glean value from takeovers such as this as sensible combinations can create a firm more valuable than the sum of its parts.As far as the overall market is concerned, we now need the banks to recapitalise in order to rekindle activity. The RBS rights issue marks the start of that and, in that sense, brings us closer to a conclusion. As the funding environment remains tight for the time being, however, we continue to avoid highly indebted firms and are being vigilant on working capital trends.

Fund Details