August 2008
July continued the negative trend in equities seen in recent months with the FTSE 100 and All-
Share Indices falling 3.7% and 3.6% respectively. However, it was a mixed month with indices
falling sharply at first with the FTSE 100 hitting 5150 before rebounding when companies
started to release interim results which suggested that, up until now at least, the economic
slowdown has not started to bite.
The economic malaise and uncertainty was starkly highlighted by a rare three way split in
voting at the MPC. Despite maintaining policy at 5%, the minutes revealed that there was a
vote each for a cut and a raise with the other 7 members opting for the status quo. Inflation
continues to be the worry and data suggests that it rose again in July to over 3.8%, well above
target. Industrial production continues to weaken globally and in the UK, it was down 0.8%
month-on-month with no respite in sight as prices continue to rise as well. The Trust has
limited exposure to industrials so this has helped.
The one positive to come out of the month was the decline in the oil price where crude closed
at $124/ barrel. Rising inventories and lower demand have fuelled the fall but if demand
continues to fall, we may see deeper problems in the global economy. Our decision to bring
down the weight of the oil and commodity stocks in the fund has helped performance as
mining, basic materials and oil and gas were the worst performing sectors.
Investors sought refuge in pharmaceuticals which is seen as a traditionally defensive sector and
whilst the Trust is underweight relative to the index, the recent introduction of AstraZeneca
helped. Meanwhile, with Santander looking to buy Alliance & Leicester, the banking sector
recovered from its recent lows. Again the Trust is underweight in the sector as a whole but our
holdings in RBS and HSBC performed well.
With concerns about debt still forefront in investors and our minds, we sold the position in
Topps Tiles this month. In addition, we exited Puma Brandenburg where, despite trading at a
discount to its NAV, we have concerns about the outlook for German property. The holding
in GTL resources was sold because we consider the risk of a single site bio-ethanol plant to
be inconsistent with what we believe our investors want. These companies were replaced by
Unilever following recent share price weakness as well as topping up Daily Mail and General
Trust, Marks & Spencer, Rolls-Royce and Premier Foods.