Fund Manager’s Diary

Monday Having spent time reflecting on the weakness of the dollar versus the pound, it is sobering to note that while both the British and American stockmarkets have risen in 2006, UK investors investing in the US, after the effect of the weakening dollar, have actually lost money so far. Hence we decide to reduce our positions in industrial engineering stocks, which have exposure to US earnings, in anticipation that their recent positive earnings momentum has ended and, if dollar weakness persists, they risk having earnings downgrades in 2007.

Tuesday After considerable due diligence, we decide to invest in a restaurant chain called the Individual Restaurant Company, which floated on AIM, for our VCT and smaller company funds. Smaller companies are less well-researched, thus meeting company management and site visits are of particular importance.

As a team of four, we meet more than 500 companies each year. Typically we never invest in a UK smaller company prior to meeting its management team. Recognising the additional risks of investing in smaller companies, the Special Situations fund tends to hold between 35 and 50 stocks. Each holding will be big enough to have an impact on the overall fund performance, but not large enough to make or break the overall fund.

Wednesday Good interim results from Speedy Hire, a tool hire business, which is a core holding in the Special Situations fund. It is pleasing as one of our core overweight positions is in support services, due to the growth in UK outsourcing. We continue to focus on companies that are profitable and cash-generative, with pricing power and strong balance sheets, such as Speedy Hire, shunning early-stage businesses with unproven business models.

Thursday The day begins with an agreed bid for our holding in Talarius, an adult gaming site operator, from Tattersalls, backed by private equity finance. The bid of 270p is a pleasing return on our investment at 80p in April 2005.

Over the past five years E300bn (£200bn) has been raised by private equity funds across Europe. This would be enough to take every listed company outside the FTSE 100 private in the UK.

While the drivers of this private equity arbitrage – a cheap cost of debt and the high real return from equities – remain intact, there will inevitably be many more deals speculated on than actually executed. It is important to focus on the fundamental worth of a company at this time.

Friday Further weakness in the dollar leads to another sell-off in the British market. While UK smaller companies tend to be more domestically focused than their FTSE 100 peers, many individual businesses are affected by weakness in the dollar.

Saturday/Sunday The weekend affords the opportunity to catch up on various pieces of equity research and plan for the following week. After three years of strong performance from British smaller companies, many observers say they are now overvalued. However, on a sector-by-sector basis, they trade on similar ratings to their FTSE 100 peers. Smaller companies are forecast to deliver 15% earnings growth over the next 12 months – double the growth of their FTSE 100 peers. Therefore, smaller company valuations are supported by strong earnings growth in conjunction with private equity activity.

I dedicate the rest of the time to the family – with two young daughters to keep up with I am kept pretty busy for the rest of the weekend.

Justin Jordan is manager of the Close Special Situations fund. His diary runs from November 20-25.