SVM UK 100 Select Fund up 8.0% in May

In May SVM UK100 Select Fund returned 8.0% compared to 4.7% for the FTSE 100 index. The fund has returned 9.6% in the first five months of 2009 compared to just 1.9% for the FTSE 100 index.

Overweight positions in basic materials and oils were the major contributors to the fund's dramatic outperformance. During the month SVM increased its holdings in companies geared to the economic recovery such as Vedanta, Inchcape and CRH, continuing to sell defensive stocks such as Vodafone and Glaxo.

The risk reward profile for equities has improved significantly over the past two months. A combination of historically low interest rates, improving credit conditions and an abundance of cash provides a supportive background for further upside.

The gradual rehabilitation of the financial market is good news for the economy and the stock market in the near term. The strengthening of the financial system and the ability of companies to raise equity in capital markets will continue to underpin the economic revival. However, the pace of the economic recovery is likely to be slow and protracted.

The history of credit contractions and asset bubble deflation typically lasts for years. The huge fiscal and monetary stimulation has acted as an antidote to the shrinkage in household wealth which will continue as people borrow less and save more.

SVM believes that we are now transitioning to a ‘new normal' phase of growth where the pace of sustainable growth in OECD countries will be 1-2% per annum. A de-levered, de-globalised and a more regulated financial system will mean fewer financing opportunities and therefore lower economic activity.

Featured stock - Royal Dutch Shell

Incorporated in the UK but headquartered in the Netherlands, Royal Dutch Shell (‘RDS') is a multinational oil and gas ‘super-major'. The company employs over 100,000 people across the globe and generated operating earnings of approximately $30bn in 2008.

As crude oil prices collapsed from their peak of $140 per barrel in July 2008 to $40 at the end of the year, investors grew increasingly concerned about the outlook for major integrated oil companies. The subsequent decline in cash flows caused by lower oil prices puts pressure on the ability of these companies to maintain dividend growth - BP has already announced that its Q1 dividend for 2009 would be at the same level as the previous quarter. However, thanks to its stronger balance sheet, RDS is well positioned to be able to continue increasing payouts to shareholders. RDS' Q1 statement showed cash balances of approximately $16bn and gearing of only 6.6%, far below the 20-30% range which the management considers acceptable.

The company is also aware of the need to reduce costs, and the new CEO has taken steps to address this. During May, he announced the streamlining of RDS' Upstream, Gas & Power and Oil Sands divisions into two businesses, Upstream America and Upstream International. This move alone will only yield modest costs savings but it highlights management's willingness to implement their strategic plan.

RDS is trading at a discount to its sector. SVM believes that this is unjustified when the group's balance sheet flexibility, estimated 2009 dividend yield of more than 6%, and restructuring process are taken into consideration.