Gulfsands Petroleum is an independent exploration and production company with assets in Syria, the United States, and Iraq. The company’s key asset is Block 26 in the North East of Syria.

Within Block 26, the Khurbet East field has already entered limited production and has estimated reserves of nearly 60 million barrels of oil equivalent. Early production from the field has been encouraging and may result in an upgrade to the aforementioned 60m barrels. The company plans to drill 4 or 5 relatively low risk exploration wells over the next 6-12 months. While none of these are likely to be company making, they should ensure a steady stream of positive news flow. Gulfsands’ healthy balance sheet (expected net cash of c. $50m at end 2009) will allow the company to finance the full development of Khurbet East and the planned drilling campaign.

Gulfsands’ assets in the US are based in the shallow waters of the Gulf of Mexico and are all relatively mature. These assets were used to fund the early stages of the Syria exploration programme and are likely to be divested when US gas prices recover. Gulfsands’ operations in Iraq remain at an early stage thanks to the ongoing uncertain political environment and continuing security risk in the area.

Originally published in February 2009.

Spirent Communications is a leading UK-based communications technology company, with two core divisions: Performance Analysis (74% of sales) selling testing hardware and software to network equipment vendors such as Cisco and Nokia; and Service Assurance (13%) selling testing technology to network operators.

The strong performance of Performance Analysis over the past couple of years, particularly in wireless testing, will provide the platform for Spirent’s future growth. As mobile networks in developed countries move towards the fourth generation (4G) of technology, backwards compatibility with existing third generation (3G) technology will be a key requirement for those equipment vendors. By investing in this area, Spirent has ensured that they are best-placed to benefit from this change. The increasing importance of wireless testing will help bring about a shift in Spirent’s earnings profile. As legacy systems diminish as a percentage of overall sales, we expect Spirent’s operating margin to increase.

Spirent shares are currently trading at a discount to both its domestic peers and international competitors. We consider this to be unjustified when the company’s significant growth opportunities and imminent margin enhancement are taken into consideration. Furthermore, healthy free cash flow generation and a net cash position in excess of 15% of the market capitalisation may encourage management to recommence share buybacks or pursue acquisition opportunities. Spirent represents 2.3% of the Fund.

Randgold Resources is a gold mining and exploration group, listed in London and capitalised at £4.7 billion. It has an extensive portfolio of exploration projects in East and West Africa with two major mining operations in Mali. Gold reserves and resources exceed 8 million ounces.

Randgold offers a relatively pure exposure to gold production, with the potential for output to grow by 15% per annum over the next five years. We expect the gold price to appreciate if currencies are debased by quantitative easing. Although Randgold’s production costs have been rising more recently, production at current gold prices is still extremely profitable, with cash costs of around $400 per ounce.

In October, Randgold and Anglo Gold Ashanti acquired Moto Goldmines through a joint subsidiary. This gives Randgold an approximate 45% interest in the Kibali gold project. While there are execution risks, Randgold’s gold production should rise to more than 1.2 million ounces per annum by 2013, as new projects start, up from 0.5 million this year.

Randgold has a good reserve base and has demonstrated an ability to find gold and implement production projects. It has a record of beating expectations with new operations. We expect a higher gold price, with further weakness in the US Dollar. This, and rising production, should see Randgold’s earnings estimates raised further.

October opened with a continuation of the rally, but from mid month the market gave up a 3% gain to end the month down 1.8% (FTSE All-Share Index total return). SVM UK Active Fund performed in-line with the Index over the month (NAV, total return). In early November the Fund’s higher exposure to resources, but below average investment in financials, is proving helpful.

In October, the strongest contributions were from resources; Valiant Petroleum, Anglo American, Afren and Tullow. Afren responded to good drilling results, and Tullow’s value is highlighted by corporate activity in the region. Almost all the disappointments were financials; Aviva, HSBC and Barclays. Hedging (short) exposure was increased during the month, focusing on financials and consumer businesses. The Fund has reduced exposure to some refinanced businesses; selling Debenhams, Northgate, Enterprise Inns and Barratt Developments. A new investment has been made in engineering group, Charter International.

The Fund continues with above average exposure to resources, industrials and technology but with a cautious stance on financials and consumer sectors. Within financials, we favour stocks with more attractive dividend prospects such as HSBC and life assurers. In resources the emphasis is on gold mining and oil and gas E&P. The overall portfolio stance reflects concern about the Pound, with an emphasis on overseas earnings.

Source; SVM to 31.10.09

Britain’s largest bank, HSBC has steadily expanded away from its roots in South East Asia in recent years. However, HSBC enjoys the status of a reserve bank in Hong Kong, and has recently announced that its CEO will be based there. Its conservative approach positioned it better than most major banks in the crisis of 2007/8. It was able to attract in deposits on lower rates than banks with weak tier 1 ratios. However, it has made mistakes - the purchase of Household International has exposed it to US consumer credit risks and was bought late in the cycle when the potential for loss should have been clear. That division now offers exposure to US recovery.

HSBC has a conservatively positioned balance sheet in terms of liquidity and wholesale funding profiles. It has benefited from substantial flight to quality and has gained market share as a result. Its ratio of loans to deposits is the best of all major global banks and two thirds of its balance sheet funding comes from deposits against an average of 45% across European banks.

HSBC has underperformed the European banks sector since the end of 2008 and as a result today trades on an attractive valuation. We believe its competitive strengths, as others are re-trenching, merits a premium to the sector.

Formed by the merger of CGU and Norwich Union, Aviva is the UK’s largest insurance company. Around half of sales come from the UK, with Aviva also having major interests in France, Holland and Poland.

Like all UK insurers the group’s capital position has worried the markets. At the end of 2008, with relatively low equity, the group’s balance sheet included £75bn of assets including ABS, corporate bonds, equities, property and mortgages. Aviva has addressed this through a hybrid debt issue, a life reinsurance deal and the disposal of its Dutch healthcare arm and Australian operations. The recent rally in credit and equity markets has also helped.

Today Aviva continues to trade at a discount to its peers, but with a much improved capital position. We expect the market to re-rate the stock. Additionally, Aviva should benefit from any further improvement in credit markets. Its credit rating is no longer under review.

With the first half results in August, the dividend was cut by 31% - the second cut in five years. The shares are at a discount to fair value. £1bn could be raised by IPO of 30% to 40% of Delta Lloyd. Although proposed new solvency regulations may require more equity to back annuities, we do not believe this will prove material. Dividend yield is now over 5%, twice covered, and we believe this and the discount to fair value makes the shares attractive.

Elementis is a specialty chemicals producer, with leading positions in high-value rheology products for the coatings, personal care and oil services industries. The group is also the world's largest producer of chrome chemicals (used for leather tanning, wood preservative and alloys). It disposed of its pigments business in 2007, significantly reducing debt.

The company has made steady progress over the last five years and is now focused on speciality chemicals. However, the company is not immune from the macroeconomic environment and has endured a difficult last nine months. While there are indications that the business environment has stabilised, there are few signs of improvement. Like most industrial companies Elementis has high operational leverage and any upturn in revenue should feed through into significantly improved profitability. A recent update from the company indicated that pricing was holding up reasonably well.

While the chrome business remains highly cyclical, we believe the current share price does not reflect the strength of the speciality chemicals business. Margins within speciality chemicals should remain in the mid-teens (from 21%), illustrating the strength of its market position, while the chrome division should benefit from the closure of its UK facility. Up 30% since the latest update, the shares are trading on a prospective 2010 price earnings ratio of 9 times, with a dividend yield of over 7%. We think the shares are still undervalued.

Originally published in August 2009.

Morgan Crucible is capitalised at £240m, and manufactures and markets carbon and ceramic components for applications in a wide range of industries and services. Like many of its peers in the industrial sector, the company has endured a difficult 12 months and recent numbers confirmed this, with organic, like-for-like sales falling by more than 10% in each division. However, fears over the weakness of the company’s balance sheet were shown to be somewhat exaggerated. Whilst, in absolute terms, net debt of approximately £290m is undoubtedly high, it would require a further significant downturn in revenues to put the company at risk of breaching any of their banking covenants. The successful refinancing of the $420m banking facility that was due to mature in 2010 provides further comfort. The group also made a substantial dividend cut to conserve cash, but even a halved dividend would yield 4%.

Morgan Crucible has entered this downturn in a far better shape than was the case in previous cycles, with a market-leading or number two position in 80% of its revenues. Management has been proactive in reducing costs and has prioritized lower-cost manufacturing and pricing power. As a result, trough margins will be higher during this cycle and both free cash flow generation and cash conversion will remain strong.

Currently trading on an estimated 2010 trough PE of 8x and EV/sales ratio of 0.6x, the stock trades at a significant discount to its sector and offers value. The Fund participated in the March 2009 refinancing, and holds a 1.4% portfolio investment.

Originally published in July 2009.

Afren is an independent oil & gas producer and explorer. Its three principal development assets are in Nigeria, with proven and probable reserves of 46 million barrels, and a larger level of contingent reserves. It also operates in Gabon, Congo, Ghana and Angola. Despite drilling success, the company’s shares have been held back by funding concerns, which was resolved by the placing of 265 million new shares at 32p in March. This diluted net asset value, but significantly lowered the risk profile of the company. The company now has finance secured to substantially grow production over the next two years, and should be able to make further acquisitions.

The refinancing, coupled with the prospect of a stronger oil price, has encouraged Afren’s inclusion in the portfolio. It has further upside from its Ebok field in Nigeria. It should be able to make further reserve enhancing acquisitions in Nigeria and elsewhere in Africa, in partnership with the national oil companies. A key strength is its attractiveness as a local partner. There is also potential to surprise on the upside on reserves and production. Despite the recent share price gains, we believe the recent performance does not fully reflect underlying reserve value.

Originally published in June 2009.

Inchcape is one of the world’s largest and most geographically diversified car retailers. The UK accounts for just over a third of group revenues, but the company also has scale operations in the Far East and some European markets. Through its dealerships and distribution network, Inchcape represents a number of leading automotive brands.

As automobile sales declined across the globe, Inchcape faced a risk of breaching banking covenants. However, the recent rights issue has alleviated these concerns. Inchcape raised £232m via a heavily discounted 9 for 1 issue. Also, net debt for the year end was much lower than expected at £408m, due to a combination of improved working capital efficiency, capital expenditure reductions and currency translation benefits. As a result, the group’s post-rights balance sheet is in a far healthier shape. It would require a significant further drop in earnings from these already depressed levels for Inchcape to breach covenants.

The economic environment means that trading conditions are likely to remain difficult for Inchcape in the short-term. However, as a result of its new-found financial stability, it should benefit from both weaker competitors exiting the industry as well as government incentives seeking to encourage purchases of new cars. Inchcape also benefits from the stabilisation of second-hand car prices. With scope for a significant recovery in Inchcape’s cyclically depressed margins, the shares appear undervalued.

Originally published in May 2009.

Last month, the factsheet reviewed the Fund’s investment in Vodafone. The risk within the telecom sector has been reduced or hedged for the Fund by running a negative position on BT Group. In contrast with Vodafone’s prospects in mobile, BT is focused on UK fixed line business and a problematic business services division, global services. In January, global services delivered its third profits warning, creating concerns overall in BT Group’s earnings visibility. Global services is currently burning cash within the group. Already, the company has announced a wage freeze.

However, our main concern in BT is the growing pensions deficit. Even with some recovery in equities, the actuarial deficit is significant and could see BT forced to make large pension top-ups for ten years or more. In March, the Pensions Regulator warned that pensions must come before dividends and this poses a risk to BT’s pay-outs. In recent months, BT has underperformed Vodafone, and we expect this pattern to continue as investors increasingly recognise the pension funding problems.

Originally published in April 2009.

Operating in 58 countries, Vodafone is one of the world’s largest providers of mobile telecommunications services. Western Europe is the company’s main market (73% of revenues), but India (5%) is a key driver of future growth. The company also operates in the US via a joint venture with Verizon Communications.

Recently announced Q3 numbers showed Vodafone’s resilience. In the core European markets of the UK, Germany and Italy, underlying mobile revenue trends were better than expected. India continued to perform well, with over 2m monthly net additions and organic revenue growth of 30%. Guidance for full year revenues was raised by nearly £2bn as the company benefits from the weaker Pound.

Vodafone faces the challenge of dealing with the prospect of slower rates of growth in emerging markets and continued intense competition in Europe. The new chief executive has demonstrated that he is prepared to meet this challenge by making accretive disposals and simplifying the company’s portfolio of assets. Increased customer usage of data services is expected to help boost revenue growth and provide margin stability in the face of increasing pricing pressures on voice revenue.

We believe that Vodafone still offers good value in terms of free cash flow. Vodafone’s prospective dividend yield is also attractive, exceeding 6%.

Originally published in March 2009.

Capitalised at £66bn, GlaxoSmithKline is a global pharmaceutical group. Annual sales in excess of £22bn, of which 24% are derived from non-pharmaceutical products including consumer healthcare.

As equity markets collapsed in the second half of 2008, GSK outperformed significantly. Concerns over a US investigation into the suitability of Advair, an asthma drug that accounts for 20% of GSK’s net income, proved overblown. In addition, the progress of the operational excellence programme is on track to deliver savings of at least £700m by 2010.

There are a number of reasons to expect the strong performance to continue. GSK have a healthy pipeline of new drugs including Tykerb (breast cancer), Cervarix (cervical cancer vaccine) and Promacta (hepatitis C). Additionally, management are increasingly focused on the potential of the consumer healthcare division which includes such brands as Lucozade, Aquafresh and Panadol. In particular, the market for over the counter medicines is expected to grow significantly in the next five years thanks to regulatory changes and emerging market opportunities.

The defensive nature of GSK’s key business, potential for further cost savings, and opportunities in the consumer healthcare segment provide a positive outlook for GSK. With a dividend yield of 4.5%, we still believe the stock offers value to investors.

Originally published in February 2009.

Tullow is a major oil & gas exploration and production group, and is a FTSE 100 constituent, capitalised at £5 billion. It has grown organically and by acquisition from a North Sea operator to a significant explorer globally – in Africa, in particular. It has built its exploration acreage through acquisitions such as Energy Africa and Hardman Resources. However, in the last two years growth in reserves has been primarily organic, with significant drilling success. In total it has 26 licenses across 23 countries, and currently produces 67 barrels of oil equivalent per day.

In early January 2009, Tullow announced a successful well testing in Mahogany-3, which is an extension to its Jubilee Field in Ghana. This result has lifted asset value to more than £10 per share, and also offers further drilling prospects. The early part of 2009 will see a flurry of additional drilling results in Uganda and Ghana. The Fund has held the shares since 2007 and we believe that Tullow will offer strong drilling potential, combined with good current cash flow. Recent discoveries do not appear yet to be fully priced into the shares. Although E&P shares have execution risks, we believe Tullow will be able to attract finance for the new projects, and future news flow includes a number of high impact wells.

Originally published in January 2009.

Capitalised at £1.1 billion, Babcock is an engineering support services company. It operates in defence, marine, rail, nuclear and engineering. Marine is the largest area, representing more than 50% of earnings. It is the leading supplier of naval support services in the UK. Although the MOD is the largest single customer, Babcock operates globally, with a substantial and broadly-based order book. Unusually, at a time when most companies are seeing forecasts cut, it is enjoying earnings upgrades. Babcock’s exposure to the public sector means it is well placed to grow even as the economy weakens. Its rating is lower than comparable support services businesses, despite its high visibility of revenue and multi-year customer contracts. We believe the shares are under-rated.

Originally published in December 2008.

The Fund has maintained a low exposure to banks since 2007, having identified the risks inherent in a business model that involved unsustainable growth and unstable financing. Many UK banks appeared significantly undercapitalised, despite meeting regulatory requirements. This became more evident with the rights issues during 2008, which also involved dividend cuts. On superficial measures, bank shares have looked cheap for some time; dividend yield, price to book value and price/earnings ratios all appeared below historic averages. However, we did not believe that these measures correctly reflected the likely deterioration in future earnings and dividend pay-outs, as activity was scaled back and losses emerged.

However, the Fund has now invested in HSBC and Lloyds TSB. HSBC is likely to be able to re-capitalise without government support, and it has avoided many of the riskier lending areas. Even so, we believe it will raise further equity and reduce its dividend. Lloyds TSB will have the benefit of government support, but should be able to resume dividend payments after 12 months. However, we believe it would be more attractive without merging with HBOS, which could delay pay-outs. We do view the risks in other banks as high, given the overall scale of their balance sheets and potential for write-downs. We expect the Fund to continue with much lower than average exposure to the bank sector going into 2009.

Originally published in November 2008.

BAE Systems is the largest defence contractor in Europe and sixth largest in the United States. The group operates through four divisions: Land & Armaments (32% of revenues); Programmes & Support (27%); Electronics Intelligence & Support (21%); and International Businesses (20%).

BAE is seeing robust growth across its core markets. In the US, the recently revised defence budget should support group orders well into 2010. In particular, increasing demand for higher-margin land vehicles and defence electronics should prove especially helpful given BAE’s firm foothold in these areas. There are also promising signs in the UK, where their Programmes division appears to have turned a corner in terms of operational performance. Furthermore, continued strong order-flows from an ever affluent Middle East will continue to bolster and diversify the group’s top-line.

After selling its 20% stake in Airbus last year, BAE now has the capacity to spend approximately £2 billion on acquisitions. The company has previously succeeded in creating significant shareholder value through well targeted acquisitions.

Recent results showed strong organic growth, a good improvement in profitability and excellent cash generation. BAE trades at a discount to its US peer group, despite good cash flow and the real prospect of earnings upgrades coming through as the year progresses. Further attractions include the visibility of its order book and strong balance sheet.

Originally published in October 2008.

AstraZeneca is the UK’s second-largest pharmaceutical group, created by the merger in 1998 between Sweden’s Astra and Zeneca of the UK an ICI spin-out. The group has major products to treat disease in cardiovascular and gastro-intestinal areas, amongst others, and has a significant biologics presence. It has a significant share in the US market, and reports in US Dollars with 2007 sales of $29.6 billion. However, in recent years it has suffered patent challenges and other patent litigation. This has been resolved more recently in the case of two key drugs, removing major short term threats to earnings. There is a longer term risk on Crestor post 2010, and some other patent challenges are likely in the medium term.

Long term EPS growth is likely to be below the industry average, but the rating fully discounts this, we believe. Dividend yield exceeds 4% and is growing, and we calculate current enterprise value is just 7 x forecast EBITDA. This places the stock on a single figure price/earnings multiple. With short term patent risks much reduced, the stock is attractive and likely to be defensive. A good update at the end of July was the catalyst for earnings upgrades, partly reflecting US Dollar strength.

Originally published in September 2008.

Firstgroup operates bus and rail transport in the UK and US, and is capitalised at £2.5 billion. In buses, it is in more than 40 major towns and cities, with a fleet of nearly 9000 buses. As a rail operator, it manages almost one-quarter of the UK's passenger rail network. In the US, it operates yellow school buses and the long distance Greyhound buses.

Firstgroup entered North America in February 2007, with the $2.25 billion acquisition of Laidlaw. The group believes it is still on-track to deliver $150 million in synergies. Already, management has reversed Greyhound's declining revenue trend. We believe that further value can be unlocked, but a disposal of this business may be a more attractive option. The group's recent first quarter trading update evidenced a strong trading position, with UK bus passenger revenue up 6.4% and UK rail revenue up 10.7%. Also, as fuel costs have risen, customers are switching to public transport, often encouraged by employer support.

We believe that this trend will continue to help offset other cyclical risks. The potential for fare increases contrasts with a likely margin squeeze in many other consumer businesses. We believe that the shares have defensive characteristics, growth potential, and an attractive dividend yield. The shares have performed less well than some other transport groups, and we believe its lower rating is unjustified. The group generates good cash flow and we believe that the shares have the potential for an improvement in rating.

Originally published in August 2008.

For some months, the Fund has used hedging to maintain low overall exposure to consumer sectors. These include retail, food retail, media and pubs. The portfolio also excludes food manufacturers and housebuilders. We believe that the overheating in the UK housing market will lead to a sharp fall in consumer confidence.

Some shares of consumer businesses have been supported by high dividend yields, but we expect a pattern of dividend cuts. Many consumer businesses are operationally leveraged, and the impact of slower sales will be magnified by competitive pricing and rising input costs. Food and energy costs are rising, and not all can be recovered from customers. Additionally, a feature of a number of consumer companies is higher balance sheet debt. Buy backs and stock tenders in recent years, combined with high levels of dividend distribution, have meant that many consumer businesses enter the slowdown with a weaker balance sheet. We believe this will trigger dividend cuts and reduce scope for further buy backs. Some may be forced to renegotiate banking covenants. Already this appears more likely to occur with some UK housebuilders. We expect weak trading to combine with margin pressures and balance sheet problems to trigger further share price falls in many UK consumer businesses, and the Fund will maintain a defensive strategy by limiting exposure.

Originally published in July 2008.

Invensys is an engineering company focused on two main businesses, process solutions and rail signalling systems. Over the last three years Invensys has undergone significant restructuring, disposing of a number of businesses, reducing debt and improving margins. The company is now well positioned in growing markets.

In process systems, the major end markets of oil, gas petrochemical, refining and power remain strong. Indeed, management are confident that recent revenue growth can be accelerated given the strength of the order pipeline. The rail business continues to benefit from the need to upgrade ageing infrastructure both in the UK and internationally. In contrast to both the process and rail businesses the controls division is enduring a more difficult time. A heavy exposure to household appliances, where demand is weakening, has put the business under pressure. In response, management have removed a large proportion of the fixed cost base and have so far succeeded in not only protecting, but improving, profits.

Despite operating in a number of attractive long cycle markets the group continues to trade at a discount to the peer group. If this discount does not close we believe that with a strong balance sheet and an improving business mix, the company may well be an attractive target for a number of its bigger competitors. Overall, we expect the shares to be a rewarding investment.

Originally published in June 2008.

This month’s feature focuses on a sector, rather than an individual holding. Financials is a major sector in the UK, representing one quarter of the value of the FTSE All-Share index. Banks represent more than half of the sector, with other areas including insurance, property and general financials. The whole sector has performed very poorly over the past twelve months, and SVM UK Active Fund continues with relatively low exposure.

In 2007, we identified the risks in the banking sector and made further sales. This stance recognised not just the risks in US lending, but that the business model for banks had become very risky. With bank executives incentivised on growth in earnings per share, and shareholders reassured by high but unsustainable dividend payments, there was little regulatory constraint on overexpansion on a relatively slim base of hard assets.

We believe that unwinding of this “banking bubble” will take some time, and is not resolved by the recent news. The recent rights issues may be insufficient to rebuild equity to a sound level. More importantly, it is likely that the future business model for banks will involve less risk, with lower returns for investors. This makes comparison with previous share price levels, or use of simplistic measures like dividend yield or earnings per share, less meaningful. We believe that there are more attractive areas of the stockmarket, with superior dividend growth prospects and lower risks.

Originally published in May 2008.

Capitalised at £16 billion, Imperial is a major international tobacco company, with its main market positions in the UK and Europe. After a strong performance, its shares fell back in early 2008 on concern about further capital raising. This followed Imperial’s acquisition of Spanish tobacco group, Altadis, in 2007.

We believe that Altadis offers attractive synergies to Imperial, and that the funding issues can be resolved soon. This will probably involve a rights issue, which should be the catalyst for further share price performance, reflecting the group’s strong cash generation and potential for steady growth. There is the potential for sale of Altadis’ non-core assets. Altadis also took Imperial into number one position in cigars in the US, France and Spain. Cigar brands include Monte Cristo and Dutch Masters.

Further major deals are unlikely, but there is potential for further smaller acquisitions in Eastern Europe, which should assist Imperial’s growth. In a weakening consumer environment, we believe that tobacco will be more stable, and that Altadis will accelerate Imperial’s growth. The Fund has invested 2% of its portfolio in Imperial.

Originally published in April 2008.

Jubilee is an AIM-listed platinum mining and exploration business. Capitalised at £67 million, it is a UK based company with acreage and exploration programmes in South Africa and Madagascar.

Jubilee’s drilling focuses on platinum and nickel, and it has a strong drilling programme in 2008. Its main project is Tjate, a platinum exploration prospect in South Africa. In Madagascar, it is drilling for platinum, nickel and copper. We believe that Jubilee is currently primarily valued on the basis of its platinum exposure in South Africa, with little value attributed to the Madagascar exploration programme. Drilling to date in 2008 has been encouraging, and the programme has the potential to deliver a significant uplift in value. With merger activity in precious metals businesses, we believe that success in the programme would make Jubilee attractive to larger groups.

Originally published in March 2008.

Man Group is a global provider of hedge funds and funds of hedge funds, capitalised at £9.5 billion. It also operates a futures broker, Man Investments. The group has £36 billion of assets under management, spread across a broad range of funds and strategies, generating approximately £1.4 billion of revenues.

Strong cash generation has allowed growth, share buy-backs and a progressive dividend policy. Although a portion of earnings depends on performance, Man's broad range of strategies has achieved some stability in fees. Against a good year for the hedge fund industry in 2007, Man's flagship AHL Fund delivered 16%, with RMF & Glenwood funds of funds achieving 10% returns. The main weakness was in new manager selection. While net inflows have slowed in recent months, this should be put in the context of the challenges for the financial sector overall. The business is still growing, and to date has been able to maintain the financing arrangements within its structured products. Although there is some margin pressure, the business is strongly financed and cash generative. Free cash flow yield over the next three years is attractive.

SVM UK Active Fund has very low exposure to financials, with no bank exposure. The Fund has an investment of 2.6% of the portfolio in Man Group. Man's shares are not highly rated for a business with a leading position in a growing industry, with good cash conversion.

Originally published in February 2008.

Randgold Resources is a gold mining and exploration group, listed in London and capitalized at £1.3bn. Its reserves exceed 7 million ounces, and there are additionally exploration projects in six African nations. The company trades at a discount to its peers in relation to new present value of future production. The group has two cash-generative mines in Mali and a strong pipeline of exploration and development projects.

As with oil, the days of 'easy gold' are over. Miners are being forced to go to greater lengths to locate gold, whilst the reserves they do find are increasingly impure. As a result, the majors are now scrambling for gold in an environment of rising prices. Smaller operators are well placed to benefit from this situation, with Randgold being one such example.

In the market for gold, a mismatch has developed between constrained supply and high levels of demand. Uncertainty surrounding global growth has led investors into gold, traditionally seen as a 'safe haven'. Increasing discretionary spend in developing countries, particularly China and India, has also increased appetite for gold jewellery. Randgold has a good reserve base, and as with all resource companies, the ability to find and extract at a cost below sale price is key. Randgold, whose Morila and Loulo operations have exceeded expectations, has shown that it is capable of achieving this. We expect a higher gold price, as the US Dollar weakens; and expect Randgold's earnings estimates to be raised further.

Originally published in January 2008.

BG Group is now the Fund’s largest investment, following strong price performance. This reflected BG’s participation in the world-class Tupi discovery in Brazil’s Santos basin. We believe BG is emerging as one of Europe’s leading liquid natural gas suppliers. Its operations comprise exploration & production, liquefied natural gas, transmission and power generation. It operates major pipelines and distribution networks and has a substantial exploration programme. There are a number of potentially favourable catalysts for BG’s share price.

BG shares in participation in the Tupi Field with Petrobras. The field has had four successful wells, with two good discoveries. BG has a share of the potentially larger structure in the region which could add further to reserves on successful drilling. Estimated recoverable barrels of oil and gas are now in the region of 5-8 billion. Tupi is a major world-class discovery, and fully supports the recent share price gain.

We believe the discoveries and potential in Brazil support some 85% of the group’s value, and the shares do not fully recognise further E&P potential. We also expect further strength in the oil price, which would add to BG’s value. We expect further consolidation within the oil and gas sector, and BG would be an attractive target for integrated oil majors.

Originally published in December 2007.

Weir Group is a manufacturer of pumps and valves for the oil and gas, minerals and power industries. The company also has a significant business supplying maintenance services to their customers.

Several years of restructuring, under the aegis of CEO Mark Selway is now bearing fruit at a time when the company’s end markets are booming. Demand for Weir’s pumps rose 18% in the first half of the year whilst margins rose strongly. A focus on higher margin contracts held back service sales, however margins increased materially. Working capital management has also been impressive as the company cuts supplier numbers aggressively, and introduces new lean manufacturing practices.

Following sales of non-core assets, the company has bought SPM, a harsh environment oil pump producer, which has developed new industry leading products. The company will be able to exploit Weir’s global distribution network to ensure strong growth going forward. Given the company’s strong balance sheet and growing reputation for making astute acquisitions, further deals are anticipated.

With some 75% of sales now accounted for by the oil & gas, minerals and power markets, there is an argument that the company should be valued with reference to the more highly rated oil service companies rather than more traditional engineers.

The management team are keen to keep expectations down, however we believe that current levels of activity combined with good operational gearing will result in further earnings upgrades as the year progresses.

Originally published in November 2007.

Kirkland Lake is a gold and silver mining company, with listings in Toronto and London. Although on AIM, market capitalisation exceeds £300 million. The group has significant gold producing properties and has a substantial drilling programme. Its five main properties in Canada have historically produced some 22 million ounces of gold. Over the past five years, the company has increased reserves by 160% to more than 2 million tonnes with good grades, representing a total of almost 1 million ounces of gold.

The Kirkland Lake region as a whole is Canada’s second most prolific historical gold mining area, and currently Kirkland Lake Gold is producing 60,000 ounces a year. It plans to step up production to 150,000 ounces and is prospecting in 16 new mineralised zones.

Although the shares fell in July and August, this profit-taking just took the share price back to its level of early 2007. The investment has more than doubled since entering the portfolio. In late September, the group gave a favourable update on its current drilling programme. We believe that a weak US Dollar will lead to further strength in the gold price.

Originally published in October 2007.

Capitalised at £4 billion, Tullow is close to the size needed for inclusion in the FTSE 100. It has grown organically and by acquisition, from a North Sea operator to a significant explorer for oil and gas globally – in Africa, in particular. It has built this exploration acreage through the acquisition of Energy Africa and, in January 2007, of Hardman Resources. In Mauritania it has interests in eight contiguous offshore blocks, both producing and undeveloped. In total, it has 120 licences in 22 countries, and produces 76,000 barrels of oil equivalent per day.

The shares stand at a premium to the value of proven and probable reserves, but do not reflect the huge potential in its current drilling programme. Recently, Tullow has raised expectations for the Mahogany Field in offshore Ghana, beating market expectations. Furthermore, results from potential high impact wells in Uganda and offshore Namibia, are due to be reported during the next six months. Tullow offers strong drilling potential, combined with current cash flow, and further growth should take it into the FTSE.

Originally published in September 2007.

Innovation Group provides software and associated services to the global insurance industry. Focussing on claims management, the group has grown both organically and through acquisitions. At present around 75% of group revenues are derived from outside the UK.

Claims management represents the largest cost item for insurance companies, with only a small proportion being outsourced. As the only global ‘all solution’ provider (via a partnership with IBM) of outsourcing services to the industry, this presents an opportunity for Innovation. The recent five year contract win with Royal & Sun Alliance gives us confidence that the business model will be able to capitalise and attract new business.

Due to market deregulation, the US is the largest insurance market in the world yet, it is less developed than the UK market. This means the region should offer premium growth prospects for the next five to ten years. Realising this opportunity, Innovation recently made a number of acquisitions in the US, both of which were earnings enhancing.

Currently, the share price does not recognise the group’s potential. Trading at a discount to its peers, despite strong revenue growth, the shares represent good value. With a larger proportion of revenues derived from recurring revenues (c. 75% of today’s revenues versus 35% in 2002), Innovation’s quality of earnings is not recognised in its current rating.

Originally published in August 2007.

BT is the incumbent UK telecoms operator, with a large fixed line business. BT has gradually had to relinquish its UK monopoly, but it operates globally, providing communications services in 170 countries. These include national and international telecoms services, networked IT and higher value broadband and internet products and services. It has four main lines of business: BT Global Services, Openreach, BT Retail and BT Wholesale.

The stock appears lowly rated as a semi-utility, and offers a well above average dividend yield. Its history has left a preponderance of negative sentiment, which has only gradually been dissipated as BT moves into growing and higher margin areas. It has announced a £2.5 billion share buy back which should support the share price whilst also underlining strong cash generation. We estimate it will move to a below market rating over the next two years, and continue to look extremely lowly rated on EV/EBITDA. It is targeting £600 million cost efficiencies this year, with larger savings still to come. The management appears increasingly confident that it will deliver 15% margin in the Global Services over the medium term. We believe that the prospect in Global Services is not rated by the market, and that the company will be able to releverage further in 2008. We believe the shares are more than 20% undervalued, and that the company could restructure its balance sheet to reflect its utility-like stream of earnings.

Originally published in July 2007.

Capitalised at just under £1 billion, Venture is an Aberdeen-based North Sea oil and gas producer. Its southern North Sea production area comprises five producing gas fields, averaging 26,000 barrels of oil per day. A further 19,000 barrels are produced from other North Sea fields. The company has a strategy of acquiring and developing stranded reserves, and efficiently producing and extending the life of older mature fields. Venture does not target high-risk exploration wells.

Venture has a strong pipeline of development opportunities, which could provide production and volume growth over the next three years. However, it may also acquire additional reserves. We believe there is little in the share price for these prospects, with the shares underpinned by the value of current production.

Venture has recently commenced dividend payments. The company last month announced unsuccessful drilling, and this gave the opportunity to add to the Fund’s investment. The Fund has benefited from bids and bid approaches as the oil and gas sector consolidates. In 2005, Edinburgh Oil & Gas was bid for, as was Hardman Resources in 2006. Premier Oil repelled an approach in 2006, and could be vulnerable again later in 2007.

Originally published in June 2007.

International telecoms group, Cable & Wireless, is in the FTSE 100 and capitalised at £4.5 billion. However, the share price at 187p stands at little more than one-tenth of its peak level of 2000. Previous management destroyed value with poor acquisitions in the TMT bubble and new management were brought in to rationalise, cut costs and restructure. Both the UK and international divisions have returned to profits growth, and we believe there is further recovery potential.

The shares look expensive in terms of price/earnings ratio, prospectively 30 times, but are better valued in terms of dividend, EBITDA and sales. The UK business should be generating free cash flow by 2008 and the pension scheme is fully funded on an actuarial basis. Revenue is exhibiting strong growth internationally. As this recovery progresses, there is the potential for the group to be broken up, selling its UK and international businesses separately. There is the potential for further earnings upgrades, and for value to be released by restructuring. Management is heavily incentivised via a long term incentive plan to deliver shareholder value, with rewards geared to achieving a share price 20% above current levels. Recovery in the UK business is key to restructuring potential, but we believe management can deliver additional shareholder value over the next 18 months.

Originally published in May 2007.

Novae is a reconstructed and refinanced insurer, formerly SVB Holdings. The company currently writes around £300 million of gross premiums. In the late Nineties, Novae suffered from poor underwriting and appeared insufficiently capitalised to deal with a tail of US losses. However, its new management has built credibility, demonstrated satisfactory provisioning, and it appears increasingly likely that no further problems will emerge.

The Fund bought its investment via Novae’s refinancing in May 2006. This issue gave management the potential to create an FSA-regulated insurer to write mid-sized commercial risks. Novae aims to build a profitable business as the management resolve the older legacy issues with Lloyds business. The management has done an excellent job of re-focusing the business and running-off problems. The team is highly incentivised to succeed and the current underwriting team has a record of success. Novae’s recent results show it has made less use of provisioning than originally feared, and this should give management an earlier opportunity to resolve the legacy issues. Lloyds businesses are attractive to US and Bermudan insurers, and we expect further M&A activity in this sector. Novae is rated well below the sector average, relative to assets.

Originally published in April 2007.

Morrison is one of the UK’s four major food retailers, operating almost 400 stores. The company damaged an excellent long term track record in March 2004 with the acquisition of Safeway. Morrison’s management did not seem prepared for the problems of integrating Safeway, although the price it paid was well underpinned by property assets. As a result, Morrison’s shares under-performed the market for two years, even lagging its competitor Sainsbury, which faced similar industry pressures.

However, this under-performance took the share price down to a level at which the shares were almost entirely supported by our calculation of underlying asset value. The City did not appear to recognise the potential for margin improvement in what was becoming a more benign environment for food retailing. The shares entered the portfolio in 2006, and since then the company has favourably surprised the market with its results, jumping 6% after an encouraging trading statement in January. The shares have also responded to the speculative interest in Sainsbury, but have lagged Sainsbury’s performance despite, we believe, Morrison having similar attractions for private equity buyers. Even without that, we believe that margins should surprise the City on the upside, and expect profits forecasts to be revised upwards. The Company will shortly announce progress on its strategic review.

Originally published in March 2007.

Biffa is a waste management business, providing waste collection, treatment recycling and disposal. It services industrial, commercial and municipal customers, offering a range of specialised services covering solid and liquid waste. It also uses methane produced in decomposing waste to generate power for export to the grid. In late 2006, the business was demerged from Severn Trent, and it may therefore take time to build up full research coverage and broad institutional ownership. However, capitalised at £1.2 billion and operating in a growing industry, it is likely to attract coverage.

A changing legislative climate is offering significant opportunities in waste management, and in a concentrated sector, there is limited price competition. Although Biffa trades at a premium to the market, in price/earnings ratio - in relation to sales and its gross earnings, it is still valued at a discount to some recent bids in the sector. We believe that Biffa’s growth potential is undervalued, and that it will beat earnings expectations. There is an additional prospect of a bid at some stage, as the industry is consolidating.

Originally published in February 2007.

Compass Group, which provides food catering services globally, fits the pattern of shares performing well in the current environment. It is a major FTSE 100 company, which has a troubled history but is now being turned round by new management. This means that investing institutions are gradually returning to the shares, while at the same time City analysts are raising profits forecasts. The shares are still well below their highs of five years ago, and also below the level for 2004 prior to their first major profit warning. The business operates in a challenging environment, but management plans could see steady margin improvement over the next five years. If economies pick up in Continental Europe this will give a further boost. The shares have already outperformed in 2006,and stand at a small premium to the market averages. However, it operates in a sector with entry barriers and should be able to achieve better profit margins if it can control costs and ensure that contracts allow cost inflation to be passed on. Successful execution of management’s plans could justify a much higher valuation.

Originally published in January 2007.

British Airways has performed well in 2006, but still stands well below its peak share price of the 1990’s. The business is undergoing a remarkable transformation, dealing with higher fuel costs whilst cutting other costs and improving load factors. Although a FTSE 100 company, British Airways is arguably still misunderstood and under-owned by UK institutional investors. Despite competition from low cost carriers, BA has aggressively cut costs and managed its pricing well. BA also has had additional problems due to a weak balance sheet, but has worked steadily to resolve debt and pension fund deficit issues. We believe it is near a resolution with the unions on its pension fund.

A number of other portfolio investments, such as Invensys, have similar characteristics in terms of appearing challenged but steadily resolving problems and releasing underlying value. We expect BA to see further earnings upgrades as it resolves problems, and its potential for further recovery is not reflected in its current rating. The opening of Terminal 5 in 2008 will significantly increase capacity, whilst also being structured to operate at low cost, handling passengers more efficiently. Passenger yields are improving as BA moves away from economy flights, in an environment where landing slots and capacity is limited. British Airways has a substantial franchise in Heathrow which can be better exploited by present management.

Originally published in December 2006.

Uranium producer, UrAsia Energy, is one of the largest stocks on the AIM market, which it joined in August. Capitalised at £780 million, UrAsia's main assets are located in Kazakhstan. It has potential to increase production significantly over the next seven years as two new development projects come on-stream. It is developing Kazakh uranium assets in partnership with the State-owned uranium producer. The company also has a development asset, where drilling aims to convert the Soviet classified resources into Western classified categories.

The company is well financed for these drilling development programmes and should benefit from the strength of the uranium price. Nuclear power stations supply 16% of the world's electricity, and demand for uranium is growing as new power stations are commissioned around the world. Russia plans to make nuclear power the source of 25% of its needs by 2030. Utilities are increasingly buying forward to secure supply.

More recently, a flood at the Cigar Lake mine in Canada lifted the uranium price to US$60 per pound, highlighting the need for utilities to diversify supply and pointing to the risk of a medium term supply crisis. We believe UrAsia is well placed to benefit from increasing demand from utilities, as governments attempt to reduce carbon emissions.

Originally published in November 2006.

Novae is a reconstructed and refinanced insurer, formerly SVB Holdings. The company is capitalised at £200 million and currently writes around £300 million of gross premiums. The company suffered from poor underwriting and appeared insufficiently capitalised to deal with a tail of US losses. However, its new management has built credibility, demonstrated satisfactory provisioning, and it appears increasingly likely that no further problems will emerge.

The Fund invested in Novae at its refinancing in May, giving management the potential to create an FSA-regulated insurer to write mid-sized commercial risks. This aims to build a profitable business as the management resolve the older legacy issues with Lloyds business. The management has done an excellent job of re-focusing the business and running-off problems. The team is highly incentivised to succeed and the current underwriting team has a record of success. However, the refinancing came during a weak period in the market and the underwriters were left with stock. This overhang has now been cleared, giving the Novae share price scope to recover. We believe the shares are still under-rated, and the value will gradually be recognised, as it becomes clearer that the business has stabilised and the team can build value with the new business.

Originally published in October 2006.

Stagecoach is a rail and bus operator, with businesses in the UK and US. Capitalised at £1.2 billion, the group was once in the FTSE 100, but fell from grace after problems with a US acquisition.These issues have since been successfully resolved, with the company returning capital to shareholders as it focused on its UK business and retrenched to East Coast USA bus operations. Management is entrepreneurial, and their interests appear closely aligned with shareholders.

Stagecoach is currently awaiting a decision on the renewal of the South West Trains franchise. Failure to secure this might adversely impact the shares. However, following the sale of its London bus operations, Stagecoach appears overcapitalised. Once the South West Train franchise decision is made, there is the potential for Stagecoach either to return significant capital to shareholders or make an acquisition. Also, stabilisation of the oil price would be helpful.

Stagecoach shares have lagged the stockmarket over the past two years, but have recently begun to recover.We believe the value of the business is not fully recognised by the stockmarket, and believe that the shares could perform more strongly when the decision is made on South West Trains.

Originally published in September 2006.

International Power is a UK-based generator and distributor of electricity. It has interests in 28,800 gross megawatts of power generating capacity spanning 18 countries. It is benefiting from a strong market globally for energy, with high UK electricity prices, and the company enjoys strong free cash flow. Load factors have also improved, and forward contracting is good. The US market is continuing to recover. Recent results should be the catalyst for further earnings upgrades for 2006 and 2007. We believe that the group's growth prospects continue to be under-rated within the utility sector, and the opportunity was taken in July to add to the Fund's investment.

Originally published in August 2006.

Invensys is capitalised at £1.3 billion and provides controls systems for a range of industries including construction and rail.The group was formed in 1999 by the merger of two struggling engineering companies, BTR and Siebe. Since then it has faced a range of problems including debt, pensions liabilities and tough trading conditions. However, new management, disposal of non-core assets, and debt restructuring are all now helping to turn the company around. The shares are now valued at just a fraction of their peak level. Some value has been destroyed, but this year should see further restructuring and resolution of pensions and some debt problems. Invensys is currently re-financing debt via a rights issue, which should allow further business restructuring.We believe that the company's previously weak balance sheet had left the shares trading at a discount to its peers. Revenues over the next three years are likely to be flat, but margins and return on capital should improve.There are still risks, but the potential for recovery is also substantial if management can successfully make disposals and complete the restructuring. With £2.6 billion of turnover, the business then could be an attractive acquisition for a larger group.The Fund has taken up its rights.

Originally published in July 2006.

Carphone is a high street retailer, capitalised at £3 billion, which is approaching the size that would merit FTSE 100 entry. It is the leading Pan-European retailer of mobile telephony products and services, with around 1800 outlets. Carphone's trading and stockmarket performance contrast with most in the retail sector, largely due to the growing importance of other telecoms services. It is essentially a hybrid group, combining retailing with a rapidly growing broadband internet service. Carphone Warehouse recently offered a new broadband and voice package, undercutting competitors such as BT and Pipex, which has been extremely well received in the marketplace. In the eight weeks to 5 June, it signed up 340,000 customers. Around half of these subscribers are existing customers of its Talk Talk service. Over this period, this take-up in broadband may represent as much as 40% of the net additions in the total market. We believe that the group is still misunderstood, with value not fully recognised. Its transition from retailer to broadband operator, and the initial losses in building up that business, distract from the potential for strong earnings growth from 2007 onwards. We believe that after a dip in profits this year, earnings could double in 2007/8.

Originally published in June 2006.

Investec is a Mid 250 financial group, which has performed well since purchase last year. Capitalised at £2.4 billion, the group has its origins in South Africa, although it is now growing its activities in the UK, US and a number of other markets. It is a specialist banking group focused on investment banking, specialised finance, private client activities and asset management. In South Africa, Investec is the fifth largest bank, but internationally it operates in niches. Private client activities account for one-third of operating profit, with investment banking at 28%, and around 20% in asset management and property. South Africa represents for just over 60% of profit, with almost all the remainder in the UK and Europe. Investec should also be able to grow by acquisition, and it is in a consolidating financial sector that could see it itself a target. Although the shares have outperformed by 50% over the past twelve months, earnings have also been revised sharply upwards. The company's recent trading results, released in early May, have sparked a round of increases to analysts' forecasts, and we believe fully justify the strong share price performance. Some of this earnings boost is non-recurring, but the group is building its balance sheet and the results should feed through into higher dividends. We believe the shares could be re-rated further, as Investec builds its brand and critical mass in the UK.

Originally published in May 2006.

AstraZeneca is the UK's second-largest listed pharmaceutical group, and Europe's third largest. However, the stock suffers from an overwhelming majority of negative analyst views. Most analyst coverage focuses on research pipeline, and is critical of AstraZeneca's weaker short term prospects. Over the past two years, the group has also suffered from patent loss and competition from generics. However, we believe that the pace of this is likely to slow, and that AstraZeneca's medium to longer term pipeline is still attractive. In addition, it has a strong balance sheet and could readily supplement its product range by further inlicensing. The shares are now starting to respond well to better news on Crestor, and some positive analyst notes are now being published. We believe that sentiment could reverse on AstraZeneca and that its low rating within the drug sector is not merited. The current wave of consolidation within the sector could also open opportunities for AstraZeneca to acquire divisions or products, and it could prove to be a target itself. AstraZeneca is the Fund's largest investment and our evaluation of the business and its pipeline targets a stock price some 20% above present levels.

Originally published in April 2006.

A new investment has been made in this London listed, UK-based investment management company. Although capitalized at just £56 million, it has access to a good flow of private equity investment proposals in China, through a number of strategic alliances. It focuses its investment in media, energy, financial services and information technology, and also provides corporate advice to investee companies. London Asia has generated strong returns from existing funds, but is now moving to a model where it will focus on raising assets separately, running them for a management fee with incentivisation, rather than using its own balance sheet directly. In March it has launched a new £50 million fund, and announced a joint venture with Capitron Bank of Mongolia. One investee company, Asia Power, has reported an almost doubling of profits, with London Asia owning 10%. We believe that the growing fee base will justify a higher premium to underlying asset value.

Originally published in March 2006.