SF t1ps Smaller Companies Growth Fund Newsletter
Issue 23 - July 2010

The Summer of Sweat & well done James & hello to Ross

I was reviewing the 40 holdings we hold in the fund yesterday morning. I am afraid that I do not rest on the Sabbath and it struck me that there is remarkable value there. Occasionally you just know that since you have been made an insider. But across the board you sit there and ask yourself how a stock where we have a crackingly upbeat recent trading statement sits on a PE of 5 and/or yields 5, 6 or 7%. The truth is that folks are nervous. Shares jump sharply or fall sharply on tiny volumes. I fear that the summer of sweat may continue.

And so our scope to insist that short term gains is limited. There may be big gains in the NAV, there may not. We now have 40 holdings and still aim to get that back to 35 as the year draws on. We just await the right opportunity to bid farewell to a few of the stocks we have followed. Those transactions will not alter the shape of our portfolio greatly. And so our strategy during the dog days of summer has been to simply add incrementally to some of our holdings were we see that recent sell-offs have left incredible value. As such we have bought more shares in Empresaria, ReThink, ILX, Symphony Environmental, Avisen and Avanti Communications.

Whilst past performance is not a reliable indication of future performance, the performance of the fund since we launched remains very good. On a just under three year timescale we are right up there at the top of the leaderboard among the UK's 59 small cap funds. That is despite a calendar 2010 year to date performance which leaves a lot to be desired. There are three possible reasons why our 2010 performance is not that good, although also not disastrous (in absolute or relative terms). The first is that we have changed our style/lost the art of stockpicking. That is not the case. The second is that our No2 No3 finishes in 2008 and 2009 were just flukes. We think not. And the third is that our rather boring value investing approach is bound to underperform in a world where stocks such as Rockhopper or Cove are the high flyers. We like to think that the third reason explains our underperformance so far this year but, as we all know, in the end value always outs. And frankly it needs just three or four of the bigger holdings to start to deliver and that underperformance will be history - that is the nature of a small and relatively concentrated fund.

Some fund managers might react to a period of underperformance with some large high risk bets. That is not our style. We are very confident about our prospects and that is why I have again been adding to my holdings in the fund just last week. And I shall continue to do so. Will the NAV be higher in 6 weeks? I know not. But will it be higher in 6 months or a year? You bet. Stocks just do not trade on PEs of 4 forever!

Finally, on a housekeeping note James Faulkner has passed his second set of fund management exams and he now officially moves from trainee to a full blown fund manager. To me exams are far less important than underlying analytical skills and James has always been well ahead on that score. Taking his place as our trainee within t1ps Investment Management - and working from our Douglas office directly with me - is Ross Jones - who is a welcome addition to the team.

Tom Winnifrith

PS I shall be giving a rare talk in London 20th July at the Minesite Forum at the Armourers Hall on Coleman Street in the City. The event kicks off at 9 AM and there is a free buffet afterwards. 6 Mining companies are presenting and I am talking on ''why perceived wisdom is your greatest enemy''. If you want to attend it is free but you need to register fast. You can do so by sending your name, phone number and snail mail address to amy@minesite.com

PPS. If you wish to add to your Growth Fund Units you can buy through any decent broker ( and also put units in your ISA or SIPP) or you can download a form from www.t1psim.com

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

Total return, bid to bid line chart from 09/07/2009 to 09/07/2010 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 visit our new website at www.t1psim.com or contact our hotline on 020 7562 3387 or email spiros.kurtidis@t1psim.com

Small Shareholders Do Matter - a 3 stock Review

There are some folks in the City who treat small shareholders with open contempt. And one certainly meets CEO after CEO who openly states that his goal is to get as many small investors off his list to be replaced by institutions. Having institutional investors is a ''badge of honour''. Having a large tail of small shareholders is just a pain. I have always disagreed with this view and will explain how with reference to the short term share price performance of three stocks we own.

The ONLY reason I can see to attract institutions to your shareholder list is that if you wish to raise money by issuing shares it makes the process simpler. Existing funds will lap up a good story and rescue a company that has screwed up (albeit at a highly dilutive price) in order to save face. But good companies should be able to raise cash from fund managers at any time and great companies do not need to raise cash at all!

Some CEOs tell me that having funds on board ''increases liquidity''. But for companies valued at less than £150 million the reverse is true. Funds do not buy in small sizes. They tend to pick up stock in small caps only via placings. The only market purchasers of small cap shares are those pain in the neck private investors. If you want liquidity you need to have a good following among PIs. CEOs tell me that PIs are just short term traders. Yes some are. But many are not. And it is not as if fund managers who swap jobs like Ashley Cole swaps bed-partners provide any long term stability either.

Ultimately it does not matter if a company's shares are owned by Sebastian Fund-Manager, a bunch of loons from the ADVFN Bulletin Board or the pension fund of the late Saddam Hussein. If your company generates cash and grows, its shares should go up and vice versa so in the long run all this talk of reshaping a shareholder base is no more than talk. What matters is results. But in the short term this can be an issue. It has been of late with 3 stocks we own:

Intandem has no institutions. This film production company is 30% owned by its management with one Angel investor and your fund owning another c22%. The rest of the shareholder list is not that long and - as such - trade is relatively infrequent. Its shares are down by around a quarter since we invested at 2.75p on very little trade. When a few folks sell the shares go down and vice versa. The great thing here is that while the management are 100% incentivised to get the shares higher long term they just do not look at the share price. They focus on running the business. In the year to June 30th 2010 Intandem will at an underlying level be either side of breakeven. This year? Who knows? It depends on the volumes of film it can get into production by September 30th so out on the streets by the next year end. Intandem is operationally geared and the final outcome will be anywhere between £300,000 and £1 million pre-tax. Next year my estimate range is £600,000 to £1.5 million. I am sorry I cannot be more accurate in my forecasts at this stage but with a market cap. Of sub £3 million I see trivial downside and massive upside. So case study 1 is to ignore all shareholders and just to generate cash. The share price will surely follow.

Northern Petroleum is still mostly owned by private investors. A month ago it decided to raise £10 million with the shares then at 110p. I do not know exactly what happened next but my guess is that at least 1 fund manager made an insider behaved in an inappropriate manner. The shares dived and the cash was raised at 85p. That was a giveaway price and Northern at 85p was valued at £80 million, sitting on c£30 million cash and cash equivalents and with a Dutch operation which should make a post tax profit of 20 million Euros next year and an Italian operation with 52 million barrels of proven reserves. The shares are as cheap as chips but Private Investors felt, understandably, enraged that they were diluted by this institutional funding at giveaway prices. And so at least some felt inclined to bank profits and sell in disgust. Now I know Northern's boss Derek Musgrove is a guy who instinctively is on the side of small investors and takes them very seriously but I can understand why some Northern shareholders felt hacked off. The problem now is that those fund managers who bought in at 85p are about as likely to buy small lines of stock in the market sold by pissed off PIs as I am to become lead dancer at the Moscow ballet. In the short term this will hold back the shares. The only people who will buy in the sizes being sold are Private Investors (and the t1ps Fund!) and it will take a little while for the indigestion to be cleared. In the long run this does not matter. Northern is worth 300p a share and will get there in due course. But in the short run you annoy PIs at your peril - especially when they own half your shares!

ILX has a good institutional holding. It also has 6000 legacy shareholders who own £25 of stock apiece. It has relatively few private investors owning £1,000 to £10,000 of shares and as a result its spread is a horror and its shares can gain 20% in a day or lose it on no volumes. The shares are now 21p, yielding almost 7% and on a derisory cashflow multiple. It is clearing its debts at a rate of knots and will be debt free in two years. This training software group has great overseas expansion prospects and is highly scalable. It is a cracking investment and I am glad to see that CEO Ken Scott was again adding to his holding the other day. At some stage this year net debt will fall below 1 times EBITDA and at that stage I think the appeal of ILX will be clear to all. The illiquidity which has held it back as punters worried about debt will see its shares race ahead very quickly indeed - we expect them to be 40p within 18 months. At that stage it will be too late to chase the stock. So our stance is that on down days when some git sells £10,000 worth and the shares slide 15% we buy that stock. Then there will be an up day and we do not chase. We wait for another down day. One day there will be no more down days and a major re-rating will ensue. It might boost the NAV of our fund if that re-rating started tomorrow. We rather hope it does not start tomorrow as we are happy adding to our holdings, banking our dividends (which incidentally we elect to take in scrip form) and waiting... that is what long term investment is all about.

How to drip feed into the SF t1ps Smaller Companies Growth Fund

We think the recent weakness provides a great opportunity to buy fund units cheaply and that aggressive investment is now a sensible move. That is what Tom has done personally. You can make such purchases by calling your broker or by downloading a form from www.t1psim.com.

But some may prefer to drip fee cash into the fund so as to avoid month on moth fluctuations. Once you have made an initial investment of £1000 onto our fund you can add to that with contributions of as little as £25 a month. You can set up such an instruction with your broker or by contacting spiros.kurtidis@t1psim.com or by downloading the appropriate form from www.t1psim.com.

Risk warning: