Fund Objective

Capital appreciation.

View on Past Performance

The fund returned -7.8% for the third quarter while the FTSE All-Share index fell -12.2%.Over the summer months poise seemed to have returned to markets. The risks to the financial system seemed well understood, and though there were some obvious areas of financial distress in the corporate sector they were related to excesses of the past. Meanwhile, the more domestically-oriented sectors were facing the consequences of a domestic contraction and the effects of an inflationary surge on the cost base.September, however, provided a rude awakening as it suddenly became apparent that the whole US financial system might be teetering on the edge of collapse. In a period unparalleled in recent financial history, institutions collapsed, were bailed out by the US government or forced into the arms of apparently stronger institutions.Against this background, individual share prices have been remarkably volatile and there have been some significant sector moves. Unsurprisingly, oil and mining came under severe pressure as doubts about the sustainability of global economic growth increased. The more defensive sentiment favoured pharmaceuticals, the relative strength of which was also reinforced by the weaker sterling.The non-life insurance sector was strong as investors sought safety in other financials, while technology proved resilient reflecting its inherent growth characteristics. Such performances all played to the current disposition of the portfolio. Surprisingly, however, banks themselves outperformed on an apparent belief that the worst has now passed.

Future Expectations

Over the weeks ahead, the market will undoubtedly remain volatile until the scale and certainty of the US government's rescue of the financial system becomes apparent. At that point attention will turn to the impact the turmoil has on real economic behaviour.Selectively, there are secure, high-quality companies operating in areas that may be affected by the downturn but are not threatened by it. Their current valuation, on anything other than a very short-term perspective, may be unnecessarily cautious and provides the opportunity to build performance for the future.

Fund Details