August 2008
Equity markets fell during July as the economic outlook deteriorated and concerns over rising
inflation weighed on the consumer. Similar market themes to those seen in June were evident
as markets slid towards the middle of the month, however, they did recover in the second half
as commodity and oil prices fell from recent highs. There was weakness across the market cap
range with small caps underperforming the wider FTSE All-Share Index.
Domestic economic news continued to weaken and with inflation still breaching the 2%
limit The Bank of England's MPC voted to hold interest rates at 5%. Inflation remains a key
concern for the MPC but figures may get a welcome respite from oil and commodity prices
declining sharply from there recent highs. Retail sales came under pressure falling 3.9% in June
with sizeable volume declines across most sectors and expectations that the second half will
remain tough.
The Trust benefited from a positive interim management statement from Mothercare and a
bounce in McBribe who will benefit from any further weakening in the oil price. On a more
negative note, the consumer facing stocks Western & Oriental, Lookers and Holidaybreak
were all weak over the period. The other main detractor from performance was F&C Asset
Management after one of their major shareholders liquidated their position.
In terms of portfolio activity, we exited Abbey, a UK and Irish housebuilder, Powerleague, and
Luminar. We also reduced Healthcare Locums, Midas Income & Growth and Hill & Smith
following strong relative performance.
The small cap market remains volatile but where opportunities present themselves we will
continue to add to our holdings which we believe are attractively valued.