Fund Objective

The Fund aims to achieve an above average level of capital growth through investing in the quoted securities of companies operating in the United Kingdom.

View on Past Performance

Support Services is now the fund's top sector overweight and has demonstrated its attractions as corporates, Government and Military become more focused on improving the efficiency of all their services. Serco, the fund's top overweight stock position, benefits from the growing trend for sophisticated outsourcing, with contracts as diverse as the Atomic Weapons Establishment and Her Majesty's Prisons.The Travel & Leisure sector (the fund's second largest overweight) had a poor quarter for several reasons: savage markdown of all consumer related stocks, higher oil price affecting tourism and a shunning of all stocks that have a property asset value. We believe the sector has overreacted to all these factors and now looks very cheap.The Oil Services sector continued to perform well as the oil and gas industry catches-up from many years of underinvestment, encouraged by higher oil prices. BAE Systems, a major fund overweight, continues to be a critical defence partner for the UK, US and Saudi Arabia. The Saudi export orders could be increased to modernize their entire defence capability while the UK and US demand for "through life support" keeps increasing. The stock has strong long term earnings visibility.The fund underweights are mainly oils / resources where we prefer the smaller services companies to the traditional defensives which are trading close to all time valuation highs.Pennon is the fund's main 'defensives' holding and has continued to perform well as its waste management business is appreciated by the wider investment community.

Future Expectations

The UK equity market looks cheap on a price earnings (p/e) ratio of around 12x and dividend yield of 3½%. This rating can stomach a substantial fall in earnings. Historically, bear markets see earnings fall 20% peak to trough. Such a fall would take the p/e to 15, in line with the long term average.Investor risk appetite is at crisis levels due to the sub-prime debacle and fears over an earnings collapse in economically sensitive and financial companies. In Western markets this leaves all but the most defensive company shares at valuations that discount a recession. As fundamentals reassert themselves over momentum we expect outperformance to resume.Corporate activity is one potential catalyst that could trigger such a return to fundamentals. Private equity firms have raised a lot of cash that needs to be deployed while, in general, companies have strong balance sheets. Such corporate buyers will be very tempted by the low valuations of many quality companies.We are finding a good spread of very cheap stocks in both the growth and recovery areas which gives the portfolio a good diversification. As companies report results through the year and analysts' profit forecasts come down to match investors gloomy expectations this should provide a base for investors to again look at fundamental value. We believe this process will lead to a re-rating of the very undervalued shares in the portfolio.

Fund Details