The Small Cap ex-Investment Trust benchmark continued to rally strongly through August gaining 4.76%. The Royal London UK Smaller Companies Trust rose 1.75%, lagging the benchmark by 3%, reducing the year to date out performance of 8.8%. Market themes were a continuation of sector rotation out of Basic Materials and into Cyclicals, Financials and US Dollar earners such as Pharmaceuticals.The extent of this rotation on share prices has been painful and exacerbated by the lack of liquidity during the summer months. Two holdings in the fund were particularly disappointing during the month. YouGov announced significantly higher costs than expected, reducing profit expectations, and Davis Service Group acknowledged signs of a slowdown in UK hotels' demand for linen services as well as ongoing over-capacity problems in their German healthcare subsidiary.Elsewhere, Hardy Oil & Gas was weak with the oil price and Optos saw profit takings regarding perceived ambitious targets for the second half of the year. Positively, Dunelm Mill rallied with the retail sector, Healthcare Locums continued to rerate upwards and the fund's healthcare stocks did well.The number of UK companies being placed into admission continues to accelerate and following anecdotal signs of further slowdown in economic activity in July and August, September activity will be crucial in determining the severity of the overall slow down. The risk appetite for small cap investing is likely to remain fragile and sensitive to both the severity of the slow down in profits (negative) and the peak in the UK interest rate cycle (positive).
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