SVM UK Absolute Alpha Fund update

In May, SVM UK Absolute Alpha Fund returned 1.4% and it has returned 4.1% since its launch on 11 March 2009. The fund has grown to £15.1m and is now available through the Selestia Investment Solutions platform.

The fund continues to make steady progress in building its exposures. The portfolio remains evenly balanced between long positions, with ongoing exposure to improving economic growth, and short positions in companies with weak balance sheets and/or challenged business models. Overall the fund is positioned only slightly net long reflecting SVM's cautious stance.

During May the portfolio enjoyed the best contribution from long positions in oil and gas companies and other cyclical businesses, as tentative signs that economic conditions are improving buoyed markets. Afren Energy and Aquarius Platinum were beneficial whilst in other areas HSBC and Pace were also positive. In the short book, British Telecom was beneficial to performance after its share price fell as concerns over its pension deficit and profitability increased. SVM has maintained its short position.

SVM believes re-stocking and Government stimulation will encourage further recovery in resources, insurers and selected industrials. SVM remains wary however of the equity market's recent rapid rise and continues to believe that the companies that have relied on credit and the consumer will remain challenged. In some businesses dividend payments will come under pressure as pension deficits become an increasing issue.

Featured stock - Afren plc

Afren is an independent oil & gas producer and explorer. Its three principal development assets are in Nigeria, with proven and probable reserves of 46 million barrels, and a larger level of contingent reserves. It also operates in Gabon, Congo, Ghana and Angola. Despite drilling success, the company's shares have been held back by funding concerns, which was resolved by the placing of 265 million new shares at 32p in March. This diluted net asset value, but significantly lowered the risk profile of the company. The company now has finance secured to substantially grow production over the next two years, and should be able to make further acquisitions.

The refinancing, coupled with the prospect of a stronger oil price, has encouraged SVM to invest. Afren has further upside from its Ebok field in Nigeria. It should be able to make further reserve enhancing acquisitions in Nigeria and elsewhere in Africa, in partnership with the national oil companies. A key strength is its attractiveness as a local partner. There is also potential for surprise on the upside on reserves and production. Despite the recent share price gains, SVM believes the recent performance does not fully reflect underlying reserve value.