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February

We sold out of Electra entirely and also trimmed the holding in Vivendi.

In the case of Electra we have had a position since 2006. We added substantially in late 2008/early 2009 when it was trading on a 56% discount and added again in the first half of 2012 on a 32% discount. During that time, as well as substantial growth in NAV, the discount has narrowed to 12% which is the level at which we sold. Given Electra’s historical trading range and the current discounts of peers, we saw limited scope for a further re-rating and expect muted short-term NAV growth given the relative immaturity of the portfolio after a spate of realisations. While the emergence of activist Sherborne Investors on the register has prompted a tightening discount post our sale, it is not immediately apparent what value they can add/unlock for a highly-rated externally-managed vehicle such as Electra. This is a good example of buying into a high quality company when it is out of favour and trading on a wide discount, and ultimately benefiting from the double whammy of NAV growth and discount contraction. We will rarely time the highs and lows perfectly and in the case of Electra, the share price continued to rise strongly in the few days after our sale. However, the focus on buying on wide discounts and selling on narrow discounts ensures we maintain a strong value discipline when making investment decisions.

Vivendi’s share price rose by 3.9% during the month and since the start of the financial year (1st October 2013) it has been the largest contributor to performance and risen by 21.8%. It continues to be pulled higher by the anticipation of the spin-off of SFR and the elimination of the conglomerate structure. However, at the same time it is also being held back by the operational challenges that continue to plague SFR and the other players in the French mobile phone industry. Our profit taking during the month reflects the fact that the discount has narrowed substantially over the last few months and the risk-reward profile of this holding justifies a lower weighting in the stock. Post month end Vivendi has received 2 bids for SFR – one from Bouygues (2.1% of the portfolio) which moved up sharply on the news of its bid.

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