The unprecedented market environment in September reflected the intensifying financial crisis and presaged multiple bank failures both in the US and Europe.Despite the US government's $700bn financial rescue plan, the fundamental problem of capital shortfalls in the banking sector has remained unresolved. Concerted interest rate cuts are expected to take place in October but it is difficult to expect an easier credit environment until there is a marked improvement in trust between money market participants.Meanwhile, lower rates are unlikely to be passed onto consumers and companies, ensuring that the current economic downturn is worse and longer than previously thought. The fund underperformed its peer group in September but outperformed the benchmark index as despite an overall cautious portfolio positioning, it suffered from its exposure to banks and HBOS in particular.The holding was sold in the middle of the month but the loss of investor confidence in the previous days and weeks detracted from performance. This was partially offset by Barclays and HSBC which generally outperformed. Elsewhere, the low exposure to resource stocks was positive, as were the heavy positions in utilities, tobaccos, pharmaceuticals and aerospace. The fund's low exposure to the consumer and industrial sectors also helped.The fund reduced its weighting in banks towards a more neutral position through the sale of the holding in HBOS and a reduction in Royal Bank of Scotland. Cyclical exposure in consumer retail was also reduced further, with the sales of Marks & Spencer, DSGI (Dixons) and Bovis Homes. Proceeds were used to increase our holdings in defensive areas with strong balance sheets and secure visible earnings, in particular pharmaceuticals GlaxoSmithKline and Astra Zeneca and utility Centrica.
3,921.75p
