Fund Objective

The Fund aims to achieve long-term capital growth through investing primarily in securities of companies domiciled or having a substantial proportion of their operations in the United Kingdom.

View on Past Performance

The Fund's performance was broadly in line with its benchmark, the FTSE 350 index. Performance was negatively impacted by stock picking within our Travel & Leisure (888 Holdings) and Banks (HSBC) sectors. Sector and stock picking within our Support Services (Regus & Wolseley) and Software positions (LogicaCMG) contributed positively to performance. An attractive opportunity to buy EMi (our largest purchase) arose after the company ended talks with a potential acquirer. There is limited downside risk to the current share price as the recent sale of Bertelsmann to Vivendi highlighted the value of the publishing business within EMi. In addition, the company continues to be an attractive bid target, as highlighted by the recent interest in the company by both Permira and Warner. Xstrata, a notable fund purchase during the quarter, is one of the cheapest large companies in the world on a price earnings ratio of around 7. The stock was a positive contributor to performance.

Future Expectations

The first half of 2006 was characterised by narrow market leadership. The second half broadened out and was driven more by fundamentals than momentum. We expect this pattern to continue leading to further outperformance from our stance. UK equities still offer good value on a headline prospective price earnings ratio of around 13x. This measure, however, needs to be dissected into its component parts. Mid-cap stocks have outperformed significantly, driven by takeover speculation. The top 10 stocks, accounting for nearly half of the market by value, have lagged due to their perceived impregnability to takeover and are now looking very good value. We are wary of this speculative background and will remain focused on larger companies showing attractive valuations. Telecommunications stocks have produced good results and have proven to be shareholder friendly in terms of dividends and share buy-backs. This sector has further to go in terms of absolute and relative performance.

Fund Details