SF t1ps Smaller Companies Growth Fund Newsletter

Issue 18 - February 2010

Is your glass half full or half empty? Consider this experiment. One group of people is shown an empty glass into which some water is poured. When asked, the majority of the group describes the glass as half full. Another group is shown the same glass full of water and watches as some of it is poured away. Most of this group now describes the glass as half empty. Same amount of water but different perceptions. I was reminded of this experiment - which I came across in Martin Zweig's excellent book on investment psychology: Your Money and Your Brain - when markets took a nasty turn for the worse last week because it suggests that our view of the market today is largely determined by where it stood yesterday.

Tom Stephenson, of Fidelity writing in The Daily Telegraph.

We wonder how many of you are feeling less inclined to buy shares now than you were 6 weeks ago when the FTSE 100 was 7-8% higher than it is today? If your exposure is to gold, with most gold stocks off by 20% how many of you are thinking about selling? If you are feeling more gloomy and thinking of getting out do not feel guilty, it is only natural. Shares have fallen, suddenly those who are saying the market is set to tumble (and who were largely saying the same thing when the FTSE 100 was at close to 4,000 a year ago) start to look a bit more plausible and anyhow it is always better to go along with the herd isn't it? Er. No.

As Benjamin Graham described wonderfully in The Intelligent Investor, the stockmarket is like a manic depressive. One day Mr Market is full of beans, he cannot see anything that can go wrong and will buy at any price. Another day the hyperactivity has gone and everything looks black. There can be no comfort. Mr Market will sell at any price. What Graham teaches us is that the investor - as opposed to the speculator - starts his investment assessment by ignoring the market, what others are saying and above all what share prices are doing. The intelligent investor simply looks at individual companies and makes an assessment of what the underlying value of that company is worth based on all available information (not factoring in anything for hope, sector sentiment or other irrelevancies). At that stage one looks at the share price.

The time to be buying into stocks where one sees a value is when Mr Market is so depressed that one can buy in not only at below fundamental value but at way below fundamental value - giving you a margin of error. The time to be selling is when Mr Market is so full of beans that the share price trades at an enormous premium to fundamental value.

So moving from the abstract to February 2010 was the market euphoric when the FTSE 100 hit 5,500? The answer has to be no. There were plenty of Jeremiahs warning that doom was imminent. There are indeed valid reasons for caution. There was plenty of cash sitting on the sidelines uninvested which - with base rates at near zippo - has to be invested at some stage. Move forward a few weeks and is Mr Market manically depressed? Again in the universal context we would have to say no once again. We do not see valuations at a level where we would advocate what Evil Knievil might term a general "hoover up.'' In some corners of the market - notably microcaps - Mr Market is pretty depressed. The failure of the banks to lend out any of the cash provided by you, we and other taxpayers is hurting smaller companies and sentiment towards microcaps remains poor. Hence we see selective buying opportunities. Across the range of funds we advise and manage we have in recent weeks assisted companies on the verge of profitability and seeking expansion capital by providing funding via very high coupon loan notes with attractive security and conversion terms.

If these companies deliver a quarter of what they promise we will bank a very good coupon and then get our capital back. If they deliver what they promise we will get a very good coupon and an equity kicker as a bonus. If (when) inflation erodes the value of the coupon it should also boost earnings and the share price and so the equity kicker becomes even more attractive.

So is our glass half full or half empty? We do not know we drank the water ages ago and moved on. We see enough value to justify small additional purchases on a selective basis by your fund. As a sign of our confidence Tom has yet again bought more units in the fund for his SIPP this month and he has already invested his full 2010 ISA in fund Units. Ahead of April 5th we'd be delighted if you followed suit.

Tom Winnifrith & Robert Sutherland-Smith

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund or if you want a simplified prospectus and an application form please contact our hotline on 020 7562 3387 or email spiros.kurtidis@t1ps.com

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund or if you want a simplified prospectus and an application form please contact our hotline on 020 7562 3387 or email spiros.kurtidis@t1ps.com

Top 10 Stocks

Sector Breakdown

Don't forget to use your ISA allowance for the 09/10 tax year!

From 6 October 2009, the ISA subscription limit was increased to £10,200 for anyone eligible to invest in an ISA who was born on or before 5 April 1960 (that is, who will be aged 50 or over during the current tax year). Up to £5,100 of the new ISA allowance can be saved in a cash ISA with one provider. The remainder of the £10,200 can be invested in a stocks and shares ISA with either the same or another provider. Alternatively, the full £10,200 can be invested in a stocks and shares ISA with one provider.

These higher limits will apply to all eligible ISA investors with effect from 6 April 2010.

Example 1

An individual is aged 65. He has not opened an ISA in tax year 2009-10. From 6 October 2009 his ISA allowance is £10,200. Up to £5,100 of his allowance can be saved in a cash ISA with one provider. The remainder of the £10,200 can be invested in a stocks and shares ISA with either the same or another provider. Alternatively, the full £10,200 can be invested in a stocks and shares ISA with one provider.

Example 2

An individual is aged 70. She has opened a cash ISA in 2009-10 in which she has subscribed £3,600. From 6 October 2009 she has an ISA allowance of £10,200. She could save up to another £6,600 in ISAs. This could be up to £1,500 in the same cash ISA, or up to £6600 in a stocks and shares ISA with either the same or another provider, or a combination of both.

Example 3

Aged 49 or below? From the 6 April 2010, you will be able to invest up to £10,200 in ISA accounts overall regardless of your age (so long as you are over 18).

Source: HM Revenue & Customs

The entire amount of your ISA allowance can be invested in stocks and shares. And it can also be invested in Unit Trusts and OEICs including the SF t1ps Smaller Companies Growth Fund. If you want to invest or transfer your ISA into the SF t1ps Smaller Companies Growth Fund or you need more information about ISA allowances, please contact spiros.kurtidis@t1ps.com or call him on 020 7562 3387.

Benchmarking

Total return, bid to bid line chart from 22/11/2007 to 03/02/2010 from UKUT and OEICs Universe

Source: Financial Express
Past performance is not a reliable indication of future results

Total return, bid to bid line chart from 03/02/2009 to 03/02/2010 from UKUT and OEICs Universe

Source: Financial Express
Past performance is not a reliable indication of future results

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund or if you want a simplified prospectus and an application form please contact our hotline on 020 7562 3387 or email spiros.kurtidis@t1ps.com

Investment Profile - Blavod Wines & Spirits - Have We Erred?

Some fund newsletters only discuss big winners and clear successes. Our record is good enough that we can discuss one investment that has, er - not quite gone to plan.

At one stage Blavod was our fund's largest holding. These days it is a top ten holding but is a long way off the leaders. We also own convertible loan notes in the company so our total holding on a fully diluted basis is around 12% of Blavod. The only people who own more on an individual basis are an unlikely duo: Baron Rothschild and Howard Raymond, son of Paul the late "media" entrepreneur. You can assume correctly that the good Baron and Howard (who is a very nice chap) do not act as a concert party.

Before Christmas everything seemed to be going full steam ahead and there was an upbeat trading statement to that effect. Yet earlier this week the company served up a profits warning. The shares are now 4p and we are still well ahead on this investment having bought most of our shares at c2.75p however the warning is not welcome. Blavod's announcement was that "third quarter sales (to December 31st 2009) were well below expectations and that as a result full-year profits will be hurt". Although the company anticipates a better final quarter, it now expects a break-even full-year out-turn - we had forecast a pre-tax profit of £300,000.

We were warned what would happen after market hours on Friday by Blavod chairman Colin Campbell and have lengthy discussions with him and with Blavod CEO Richard Ambler (who has to his credit bought more shares after the alert). The problems are that it can be difficult to push price increases on products through, particularly with the supermarkets given their obvious power. Recently the company has seen an opportunity to raise prices but at the time it was able to achieve higher retail prices on several of its key products, share was lost to competitors who promoted heavily. The evidence into the new year as these promotions are ending is that Blavod is having more success.

Moreover, the Blavod black vodka product has suffered from lost distribution in some UK retail outlets (part caused by the introduction of a rival ‘black vodka', the threat of which has since been diminished by legal action). It is also the trend that the places where distribution was lost have realised that Blavod's product is more attractive to customers than what it was substituted for. As a result, distribution is being re-gained and the buyers are unlikely to make the same mistake again any time soon. And finally the company could have sold more, but has been strict on credit - particularly as companies in the industry continue to go bust.

Having said all of this the speed at which an upbeat trading statement turned into a warning makes the position of the soon to retire FD pretty hard to justify. A replacement has been found and is impressive and already working at Blavod. We see no reason not to accelerate the handover. We would also like to see the board strengthened by the appointment of a non executive with hands on business experience and who is, shall we say, not of the same generation as the current non execs. All parties know our views. As owners of such a large stake we have a right to be heard.

So should we start to think about selling? In short, no. There are no cash concerns and the company states that:

"Whilst this setback is very disappointing, the Board believes that it is short term, and is confident of achieving a meaningful profit in 2010/2011. There are major causes for optimism; Blavod will regain UK distribution, and new initiatives are in hand to support the Blavod brand. Moderately increased prices have been agreed on several brands which will improve margins and allow further advertising and promotion support, and a number of new products are planned to be introduced in the Spring. Furthermore now that the Company has deepened its infrastructure to be capable of operating a higher level, it will not increase its overheads."

As such, we expect a profit of £300,000 is on the cards for the year to March 31st 2011 and that the year after will - thanks to operational gearing see £700,000 achieved with a 7 figure number on the cards for 2013 - a year behind schedule. The market capitalisation, of £3.6 million fails to discount this. The valuation metrics typically used in the industry (based on multiple of cases sold), suggest that when a trade sale is achieved it will be at a multiple of today's price. We will have to wait a bit longer for the big payday and Blavod should listen to its shareholders in terms of its board. But we see no reason to lose faith.

Risk warning:

The value of your investment can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not a reliable indicator of future results. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice. This document has been approved by T1ps.com which is authorised and regulated by the Financial Services Authority FRN 192801).