October 2008
September was not a month for good news in financial markets. The most significant amongst
a glut of bad news was the Fed’s decision to allow market forces to reign and Lehman Brothers
to collapse. This led to widespread fear and mistrust amongst the banks. Rates for lending
anything longer than overnight leapt to record levels above policy rates, further drying up
liquidity. This forced Merrill Lynch into a takeover by Bank of America whilst closer to home,
HBOS suffered the same fate with Lloyds TSB stepping in as the white knight.
All of this turmoil resulted in some drastic and unprecedented action from central governments
with the UK banning new short selling of financial institutions and requiring a disclosure of
existing positions. Meanwhile, in the US, the Treasury chief, Hank Paulson, detailed plans for
a $700bn fund to buy the troubled assets that are weighing heavy on banks’ balance sheets.
However, this was initially voted down by Republicans who backed a more free market
approach of letting them try to sort out the mess themselves. The impact on the markets was
predominantly negative with the FTSE All-Share down 13.2% over the month which itself hid
some substantial volatility. This actually benefits Glasgow Income as higher volatility allows us
to generate higher premiums for the options we sell.
Almost all sectors went into retreat in September with only non-life assurance posting
positive gains. The worst performing sectors were industrial metals and mining and the fund’s
underweight position in these sectors helped performance. Likewise, we benefited from utilities,
food retailers and tobacco, where we have recently introduced British American Tobacco, albeit
at an underweight relative to the FTSE All-Share.
Economic data fared no better than the market with inflation increasing again to 4.7%, the
highest level since 1992. This encouraged the Bank of England to maintain interest rates at 5%
for the 5th month in a row but they voted 8-1 (with David Blanchflower again calling for a cut)
which suggests that with resource prices decreasing, there is a belief that we are near the peak.
House prices continue to slide with volumes of sales reaching new lows and different surveys
reporting between a 1 – 2% fall in prices.
Transactions over the month included reducing further our mining exposure with First
Quantum and Aurum Mining both sold. We also exited equipment hirer Ashtead and recycled
the capital into SIG which, selling insulation to the building industry, is exposed to similar
macro factorials but has a stronger balance sheet and better prospects derived from regulation.
Apart from reducing the gearing in the fund, proceeds from sales went to topping up core
holdings which had been caught up in the market malaise including Millennium & Copthorne,
Persimmon, Kesa Electricals and AMEC.