July saw equities recover their first half setback with a sharp rally. The FTSE All-Share Index returned 6.9%, with financials leading the rise. Stocks that had performed well in the first half generally lagged the rally. SVM UK Active Fund gained 3.2% (NAV) in the month, reflecting the duller performance by gold stocks and industrials, and the Fund’s lower exposure to financials. In early August, the market has been less narrowly focused, helping performance.
International Power was the strongest performer in the month, following an agreement to merge interests with GDF Suez. A special dividend could be paid to shareholders. We believe that M&A activity will be strong this year, with overseas buyers focusing on UK industrials, in particular. There were good gains in Virgin Media, Gulfsands and Hyder. New investments have been made in Lloyds Bank and Royal Bank of Scotland ahead of results, and an additional investment has been made in Tullett Prebon. A number of oil and gas exploration and production businesses in the portfolio have strong drilling programmes over the remainder of the year. One of these, Premier Oil, is featured as stock of the month.
The Fund is effectively fully invested, emphasising oil and gas E&P, and industrials. We remain cautious on consumer sectors.
Source: Lipper hindsight to 31.07.10
Financials
As the outcome of the stress-tests on European banks proved relatively benign and regulatory concerns eased, some of the headwinds facing financials have lifted. A string of positive trading updates also improved sentiment towards the sector. We believe that many investors remain underweight financials and there is scope for further outperformance.