October 2008
September was an especially difficult month for equities. Markets fell across the globe as
investors worried about the potential collapse of the international financial system. Liquidity
evaporated and across the World major financial institutions collapsed. The month witnessed
the demise of the large investment banks as Governments fought desperately to bring some
stability to the system. The authorities in the US nationalised Fannie Mae, Freddie Mac and
the insurer AIG. Such action was unprecedented but its necessity was clearly illustrated by the
turmoil that arose following the bankruptcy of Lehman Brothers. Meanwhile in the UK the
Government was forced to nationalise Bradford & Bingley and in Europe the authorities in
Germany, Benelux and Iceland were forced to act.
Volatility rose to historic highs and share prices swung wildly as investor nervousness increased
almost by the day. In such an environment the fundamental prospects for and appropriate
valuations of companies were disregarded. Companies within the portfolio experienced large
movements in prices often on the back of no news flow.
Activity
Although mindful of the difficult environment we selectively topped up a number of holdings
over the month. These included Millennium & Copthorne, Wm Morrison Supermarkets and
Venture Production. We exited Topps Tiles over concerns relating to both the outlook for
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trading and the deteriorating state of the company’s balance sheet. Additionally we exited
Rentokil Initial, following a series of profits warnings and Dawnay Day Carpathian where we
had concerns about the outlook for trading amongst its tenants.
Outlook
Whilst the United States Congress has approved the much discussed “bailout plan”. Precisely
what form this will take, and how effective it will be, remains to be seen. There are grounds
to hope that, in the short term at least, it will bring some stability to the financial system.
However, it is now clear that we are heading into a recession in the UK and probably elsewhere
as well. The effects of this are being exacerbated by banks decreasing willingness to make
credit available to both companies and individuals. Consensus expectations for earnings
growth still look to be too high and it is likely that we are entering a period of rising earnings
disappointments and corporate failures. However we believe that our focus on strength of
balance sheets, transparent earnings and solid cash flow will come to the fore and see our
investments though this period.