Fund Objective

To achieve above average long-term capital growth through investing in the quoted securities of companies listed on European Stock Exchanges.Specifically, the Fund invests in those securities which are believed to present special opportunities for capital growth.

View on Past Performance

The financial crisis, which unfolded as the quarter progressed, gave the Banking sector a rough ride. Some banks were saved - in Europe Fortis, HBOS, Bradford & Bingley, Dexia, and Hypo Real Estate - either by being nationalised or taken over by other banks. Others, both in Europe and the US, were forced into bankruptcy.Economic news in the US and Europe continued to be worse than expected. Investors realised the slowdown was spreading and certain cyclical sectors and stocks came under more pressure. On the positive side, the price of oil dropped significantly from its record $147 per barrel July high, which should help ease inflationary concerns.Fund performance was weak as markets fell. Overall, sector positioning was good. The fund benefitted from being defensively positioned away from cyclical sectors and Financials. Healthcare and Consumer Staples, which traditionally perform strongly when economic growth comes under pressure, were favoured. However, stock selection was disappointing.

Future Expectations

Over the next year we do expect economies to get worse. However, we have become more bullish on equity markets. The most recent developments make us feel that markets are approaching the point of "maximum bearishness". Stock markets go down if things are worst than predicted. When the worst is predicted there isn't much further to go!The European equity market is trading on an historic P/E of just 8.5x. Assuming the worst - a severe recession with earnings falling 50% over the next two years - this would leave stock multiples of just 13x at the trough - much lower than on previous cycles. Therefore, the market appears to be pricing in earnings' falls of over 50%, which gives a fair degree of protection.Equities look good value too when compared to bonds. The MSCI Pan European index is yielding 4.5% - higher than the German long bund yield. While bonds may drop, dividends fall and inflation rise there is a high level of protection built in at current equity valuation levels versus bonds.

Fund Details