Dunedin Smaller Companies Investment Trust PLC

Manager's Monthly Report

April 2013

March saw equity markets deliver a 10th consecutive month of gains. Smaller companies outperformed their larger counterparts posting a total return of 2.1%, compared to the 1.3% achieved by the FTSE 100 Index.

Cyprus was the most significant macroeconomic event during the month. It again demonstrated the rapidity with which the eurozone debt crisis could reassert itself at the forefront of investors’ minds. The decision to make bank depositors bear a portion of the losses may well mark a watershed moment in the evolution of the crisis. It begins to reapportion the pain of adjustment between creditors and debtors. Such action may be necessary in other peripheral nations though the relative sizes of their economies make the risks of trying and failing materially higher. Across the region as a whole, the 4th quarter GDP reading of minus 0.6% marked the third quarter of contraction.

In the UK the budget pointed to a requirement for further austerity. Expectations for growth were downgraded from an anaemic 1.2% to just 0.6%. Despite the best intentions of the Chancellor to balance the books the very disappointing performance of the economy continues to defer a meaningful reduction in the deficit. The house building industry received a boost with the announcement of the “Help to Buy” scheme and £130bn of mortgage guarantees. Whilst this will provide a short term stimulus it is another example of politicians endeavouring to resolve a problem of over indebtedness with additional debt. The UK construction industry as a whole continues to experience very difficult conditions with output at the start of 2013 down 7.9% relative to the prior year. Inflation has again ticked up as the impact of on-going sterling weakness is felt through rising import prices.

In the portfolio we have been taking profits in companies that have performed well. These have included The Restaurant Group, Victrex, Keller, Weir, RPC and Bellway. The proceeds have been reinvested in companies that have experienced share price weakness such as Anite and Bloomsbury or in businesses where we have been trying to build the size of our holdings. Amongst these have been Devro, Acal and Euromoney Institutional Investor.

Recovery in the US is continuing. Unemployment has fallen to its lowest level in four years, new housing sales continued to increase and consumer confidence improved. This was despite the implementation of sequestration and the end of certain temporary tax cuts. It would be surprising if the news flow continued to be as positive especially with the May expiration of the Debt Ceiling suspension. We have observed for some time that equities do not appear expensive when compared to fixed interest instruments and in particular sovereign credits. That remains the case but the moves experienced by equities since June of last year has resulted in a re-rating of many companies. These valuations may be justifiable if the businesses concerned can deliver the long term growth that is expected from them. Those that fail to achieve expectations are likely to suffer a double hit from both a decline in earnings expectations and a de rating. Such an environment illustrates the importance of good quality stock picking.

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Source: Monthly Factsheet Aberdeen Asset Managers Limited