December 2008
November was another tough month for smaller companies as the market took grip of the
deterioration in economic news flow translating to the real economy. At a company level there
was considerable uncertainty as production was aligned to lower demand levels, and with
manufacturers de-stocking a number of companies issued profit warnings. It has been clear
that a recession in the UK was likely, but there has been a swift change through the month
that caught out a number of management teams. Against this backdrop the FTSE SmallCap
(ex IT) Index fell by 9% on a total return basis with the Trust outperforming marginally as the
NAV fell 8.9%.
The economic picture continued to deteriorate with rising unemployment one of the main
concerns. The Halifax reported a fall in house prices of 2.6% in November, taking the year to
date decline to 14.9%. Inflation which was predicted to fall on the back of lower commodity
prices did come back from 5.2% in September to 4.5% in October. In response, the MPC cut
interest rates by 150bp to 3%, their lowest level for 53 years. There was, however, reluctance
from the banks to pass these on in full through mortgage cuts to the consumer despite plenty
of rhetoric from government. The government also announced a stimulus package in the Pre-
Budget Report (PBR) with a 2.5% cut in the rate of VAT but there also remains uncertainty as
to the longer term tax implications of these spending announcements from the Chancellor.
Over the month we added three new names to the Trust on weakness. We introduced RM, the
education provider who are benefiting from the government investment in building schools for
the future. We introduced healthcare provider Care UK, and specialist chemicals provider Victrex.
We also added to our Venture Production holding on weakness which is tracking the oil price
lower despite the major part of the profit being linked to the gas price which to date has been
more resolute. To fund these purchases we exited Diploma, St Ives and F&C Asset Management.
Although the outlook remains uncertain expectations for corporate profitability are starting to
be reflected in the valuations. We will continue, therefore, to invest in quality companies with
solid balance sheets.