SVM UK 100 - energy and basic materials deliver outperformance

SVM UK100 is up 2.3% year to date (to 30 June 2008), compared to a fall of 11.6% in the FTSE 100, and an average return of -14.6% for the UK All Companies sector. The fund's high exposures to energy and basic materials have been the major contributors to outperformance.

SVM UK 100 Select Fund's main oil and gas investments are in companies with well financed and strong drilling programmes. BG Group, Tullow Oil and Dana Petroleum are all examples of companies that have delivered significant new additions to reserves in the past year. They have been helped in winning new exploration opportunities by the unwillingness of many nations to deal with oil majors. That distrust has made oil juniors more attractive partners. Even BG Group - now the UK's tenth largest company - is viewed by Brazil as an acceptable partner. This contrasts with the challenges that BP faces in defending its interests in Russia.

SVM has also invested in other beneficiaries of the longer term trend to drilling in more challenging areas. A number of oil service businesses have been bid for over the past year, leaving the growth opportunities in the remaining independent businesses such as Hunting (a recent addition to the portfolio) and Weir Group, looking very attractive. Further consolidation in the oil and gas sector seems likely, with the growing reserves of some oil juniors being sought by major integrated oil groups, and further bids for the expertise of oil service businesses.

All investment trends eventually become overblown. Once a favourable pattern is widely recognised, it usually draws in too much money based on unrealistic expectations. SVM UK 100 Select Fund therefore maintains a pragmatic approach and the flexibility to change focus as the cycle develops. Portfolio exposure to resources will be reduced as price targets are reached.

Featured stock - Wood Group

Wood Group is an international engineering company principally serving the oil and gas sector. Due to years of underinvestment in exploration, oil companies are struggling to keep up with current levels of demand. As a consequence, the price of oil has risen sharply. In this environment it is increasingly economic for Exploration & Production companies to go to greater lengths and costs to produce in remote inhospitable regions. This presents an opportunity for Wood Group.

The company operates three divisions: Engineering and Production Facilities, Well Support and Gas Turbine Services. The technologically advanced engineering division has prospered from its exposure to Canadian oil sands. The Well Support and Gas Turbines businesses are also growing robustly as significant new contract wins continue to support the top line.

Despite strong market positions, good visibility in earnings and expanding margins, the stock continues to trade in-line with its peer group. Considering Wood's superior fundamentals, SVM considers this unjustified. With pricing set to remain strong and the company investing heavily in the business, particularly in staff, SVM estimates that analyst earnings expectations will need to be revised upwards. As the group continues to deliver SVM expects the stock will be re-rated. Furthermore, with the sector in consolidation mode, it is not beyond the bounds of possibility that the company receives an approach from a third party.

For more information, visit svmonline.co.uk