Dear UK-Analyst.com member,

Why corporate activity is picking up and how we play it

Corporate activity among smaller quoted companies is picking up. Every day there seems to be something new afoot. Why, you may ask is this happening now? It is a story of buyers and sellers. Buyers, it appears, reckon that having survived the worst of the downturn, there is now some visibility of earnings and so they are encouraged to expand. And with small cap stocks - in many cases - trading on derisory multiples there are clear opportunities to buy and add value. Moreover there are now some sources of funding becoming available. The banks are, it appears, lending a little. Not a lot. But something is better than nothing. Moreover the equity markets are supporting fund raisings where there is a good story to tell - i.e. a good acquisition rather than just another bail out of a broken business plan.

But there is something else happening - a willingness of sellers to accept realistic prices. I am not sure whether this is capitulation, a desire to sell out before yet another hike in CGT or just a natural process. But whereas two years ago (the last time there were corporate buyers out in force) vendors tended to value their company’s in relation to a past (always higher) share price there is now a willingness to compromise and, consequently, more transactions are being completed or at least contemplated.

History shows that a pick up in corporate activity is the inevitable result of a sustained period of weakness in equity markets. That is the way capitalism works. If share prices fail to reflect underlying value then other mechanisms inevitably come into play. And as M&A activity starts to close the gap between share prices and underlying value then investors start tore-enter the market (on the sell low buy higher principle in which too many people always operate). The prize for those who bought low when others were droning on about a long term shift to the safety of blue chips or the death of the cult of equities or similar nonsense, is therefore clear. We note with interest that with small caps having made some gains already a report from Trustnet on 9th August that professional investors are starting to back the sector. You do not say...

So how do we alter our strategy as we enter a new cycle of the market? Well we do not. Our approach to investment never changes. We look to buy shares in good companies when the values are incredibly appealing and then wait. That can lead to short term underperformance as we do not claim to be able to spot the bottom in terms of sentiment. Anyone who makes that claim is, in our view, either a fool or a liar or a chartist or any combination of the above. So we have bought into value and now wait. When we have spare cash to invest we add to one of our existing holdings where we see the greatest untapped value and carry on waiting. So in recent weeks your fund has bought more Avisen (ex cash PE of 1) in a greedy way and has nibbled at ILX, Intandem, Northern Petroleum and Access Intelligence.

Can you see a tangible result? Investment is a long term game. Our fund is almost 3 years old. We do not view that as long term but the fund management industry does. So on November 21st we will get a three year record. As things stand we will be at the Chelsea end of that table not the West Ham End (based on last season not the one about to start when Avram will undoubtedly guide the Hammers to glory). And recent trends enhance our standing rather than detract from it. We remain upbeat about our prospects and hope that you share that view.


Tom Winnifrith
Senior Fund Manager

Buying shares in the SF t1ps Smaller Companies Growth Fund is easy and shares in the Fund are eligible to be held in an ISA, Self Invested Personal Pension, and for inclusion in a non-stakeholder Child Trust Fund account too.

The SF t1ps Smaller Companies Growth Fund provides expert management of your investment at a competitive price.

1. Contact your broker. Most brokers offer the chance to buy units although few can match our initial rate of 2.5%. But call your broker and give him the fund's SEDOL code: B28 R5 W3. If your broker will not deal please email admin@t1psim.com and we will try to rectify the situation.

2. Deal through t1ps and The Share Centre at the initial fee rate of 2.5%. If you want an application form email growthfund@t1psim.com or go to www.t1psim.com

3.Once you have made an initial investment (of as little as £1000) you can set up a monthly standing order with The Share Centre to drip feed further cash (as little as £25 a month) into the fund. All existing fund holders can set up such an order.

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund visit our website at www.t1psim.com

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund visit our website at www.t1psim.com or email growthfund@t1psim.com

Investment Objective and Strategy

The investment objective of the Fund is to achieve long term capital growth in excess of the Hoare Govett Smaller Companies Index from making value based investments in UK smaller companies with a market capitalisation no greater than £500 million at the time of investment.

It is the Fund’s policy to invest predominantly in securities of UK smaller companies admitted to or dealt in on any of the markets of the London Stock Exchange, including the Alternative Investment Market (AIM) and the Domestic Market.

The Fund aims to achieve the investment objective and policy primarily through specific stock selection. In so doing, the Fund will seek to identify UK smaller companies with improving financial performance, solid balance sheets and which either are or will shortly be cash generative, but which the Fund considers to be undervalued by the market.

We are experts in identifying undervalued smaller companies and we believe taht the small cap universe offers great opportunities. We focus on excellence and we focus on value.

Tom Winnifrith - Fund Manager

Risk warning: