We were delighted to see the report that Tullow have discovered oil onshore in Kenya for the first time.  The area they are drilling has a similar geology to their very successful Ugandan operations, but this time it’s over an area about 10x the size.

Tullow have also identified over 80 exploration prospects that have been materially de-risked as a consequence of this discovery.

Whilst it will take several years to fully appraise the area, it appears that Tullow may have found another significant basin to add to a long list of exploration success.

Tullow has been one of our favourite stocks in the oil E&P sector for some time and continues to be so. Indeed, it was also identified as the FTSE 100 Index’s second best performing stock over the last decade posting a return of 1,716%.*

Let’s hope for the same over the next decade!

(*Source: Investment Week figures to 3 March 2012)

I’ve held recruitment company SThree in the portfolio for about 12 months and it’s a stock I am looking to add to if the price is right.  Their 2011 results were good posting decent growth, strong cash generation and with an attractive yield approaching 5%.

SThree started life in the UK as an IT based recruitment specialist.  As recently as 2008 60% of revenues came from the UK and 40% from the IT sector.  Now the figure is 65% international and from a much broad business mix with IT accounting for less than 20%.

The company is well placed to benefit for the global economic recovery and provides the Fund with some cyclical exposure.  There is also the potential for M&A activity, but even without this I like the company as its core business is very attractive.

Cove Energy – We continue to sell down our holding using bouts of market strength

Bowleven – The recent tentative approach from Dragon Oil shows that other parts of the industry may also see the value we do in Bowleven’s assets.  The pre-approach share price performance however, has been adversely impacted by market concerns over how to use the gas that is found with the oil, which cannot be flared - a commercial use is therefore needed and agreeing this is taking time.

While we believe that Bowleven may well be acquired at some point in the future, the starting price should be significantly north of the 80p it was trading at before the Dragon Oil approach.  The catalysts we are looking for to achieve this along with a possible time line are as follows

• Q1: A draft exploitation application/development plan submitted to the Cameroon Govt, which will trigger a 30 day put up/give up for Vitol on its option to acquire a further 10% stake in Block 7 Cameroon for $50m.
• H1: Completing the sale of its stake in the EOV field – rumoured price $35m+
• H1: Signing a memorandum of understanding with the Cameroon Govt/Ferrostaal to supply gas to enable the construction of a Fertiliser plant.
• Q3: Spud IM-5 appraisal well – to prove there is sufficient gas to enable the finalisation of gas sales agreements.
• Q3: Spud onshore Bomono well (100% owned by Bowleven) – targeting a significant prospect.
• Q4: Spud 2nd appraisal well in either its IE or IF exploration blocks or potentially further exploration/appraisal well in Block 5.
• Q1 2013: Finalise and sign gas sales agreements to enable the commencement of construction of development/production facilities with a view to first oil in 2015.

Nanoco – After a delay in the testing of its technology last year caused by the tsunami in Japan, Nanoco how has clearance for its green and red light quantum dots.  This means its new technology can now be used in the next generation of HD TVs.  The potential use of the technology is now also spreading to other areas such as solar panels.  We believe that the pause in the share price performance of late has been down to a Japanese technology fund being required to sell its holding and focus on investing in the domestic market to aid its recovery from the tsunami.  In the short-term this seems to have satisfied the needs of the marginal buyers of the stock.  Once this has worked through the system we anticipate further strong performance from the shares as its technology is rolled out in a series of products with strong underlying demand.

London Mining is held by both Peter Lees in his UK Alpha Fund and in my UK Equity Income and is one of our long-term favoured miners. The first shipment of iron ore from its Marampa mine has just left Freetown in Sierra Leone, en route to a European blast furnace, where a premium over Chinese pricing can be secured.

This marks a major milestone with the start of operating cashflow, which, alongside the recent equity raising (in which we took part), should enable a self financed ramp up in production to around 5m tons per annum by 2014 and to close to 10mtpa in the medium term.

We consider the shares to be materially undervalued. The ordinary shares are held in both Funds, but I also own the convertible bonds in the Equity Income Fund.

Oil exploration and production company Cove Energy has put itself up for sale.  Its Africa based assets include the 8.5% stake in the Rovuma Area 1 offshore Mozambique. The partners have discovered 15-30+ trillion cubic feet (“TCF”) of gas already with plenty more prospects to drill in what is shaping up to be a very significant liquid natural gas project.

This move is likely to see interest from both oil majors looking to add new resources and Asian utility companies seeking security of supply of gas.

Cove Energy is held in both the F&C UK Equity Income and F&C UK Alpha Funds, so both have done well from their holdings and are set to benefit from any further rise in the Cove share price now that the announcement has been made.

This is just the result we look for from companies in the E&P sector and is in line with Cove’s stated strategy since the Funds bought into the stock some time ago.  We have worked closely with the company and helped fund their exploration activities through a series of equity fund raisings.  This was on the clear understanding that there would come a point when they would look to realise the value of the assets they had discovered, leaving it to the larger players with deeper pockets to fund the final development and production phase of their assets.

Equity markets are clearly being driven by macro factors and this looks set to continue for some time to come.  So looking for capital growth potential through bottom-up fundamental analysis has been difficult.

In such an environment though, bottom-up research still has a lot of value in identifying strong sources of income potential for my UK Equity Income Fund.

I have been looking at the listed Lloyds syndicates and recently added Amlin to and increased holdings in Beazley in the portfolio.  The outlook for insurance rates is positive and both organisations have a conservative approach to investment in the business.

Both companies also have an attractive dividend yield around 7%  for Amlin and 6% for Beazley, which I believe should be sustainable.

London Mining with its iron ore assets in Sierra Leone is a favourite of both Peter Lees and myself and held in our UK Alpha and UK Equity Income Funds.  We both own the equity and I also own the convertibles in the income fund aiming for the best of both worlds.

Having visited the London Mining operations in Sierra Leone a few months ago I was keen to attend last week’s seminar on investing in the country hosted by the High Commissioner to the UK and the Ministers of Finance and Economic Development, and Trade and Industry.  Henry Bellingham MP, the Africa Minister in the Foreign and Commonwealth Office was also there. 

As an existing investor in London Mining I wanted to hear what was said about foreign investment into the country, as their overall approach in this area would likely impact on the value of my holding.

The news was very positive with the government making clear its intention to promote foreign investment in three key areas, agriculture, tourism and mining.

What was also reassuring to hear was the progress the country is making in terms of transparency and corporate governance.  In a recent World Bank Report* Sierra Leone was identified as one of the most improved areas for doing business as a result of economic reforms put in place across the country now that the civil war is over.

Iron ore is the key asset for London Mining and the development of this resource is also crucial to the GDP and health of the domestic economy.  The start of production from two iron ore projects (including London Mining’s Marampa asset) in December 2011 will likely see the country’s GDP increase from $2.1bn to $3.4bn, over 60% in 2012.  If only George Osborne could engineer such growth all our debt problems would be over!

* World Bank – Doing Business 2010 - Doing Business in a More Transparent World

Why is a manager of UK equities off on a fact finding trip to China I hear you say.  But as you know, the UK equity market is much more a play on the global economy than the fortunes of the UK, so it’s eminently sensible.

There area number of issues I will be focusing on in my meetings.

1. To find out what it’s really like on the ground rather than just believe what commentators tell us.
2. What are the supply chains like and how could they impact on economic activity elsewhere.  Remembering the impact of the de-stocking back in 2008/09.
3. How is the funding of industry and infrastructure segregated from that of the property sector?  Can the impact of any property bubble bursting be ring-fenced?
4. I am also attending a meeting involving the big mining companies and China’s state planners responsible for infrastructure investment. I will be looking to find out if the mining bosses are right in that the scale of the internal investment is still such that any moderation in global growth will not really be an issue for them.

So watch this space as I will be reporting back in a conference call on 20 October at 11.00 am.

I’ve just come back from visiting a company that both Peter Lees and I own in our UK Alpha and UK Equity Income Funds.  The visit involved a very early start as I joined the regular commute to work of some 20 specialist workers.

Though I must say I felt somewhat disconcerted as I pulled on my special dry ‘ditching suit’ and listened intently to a 30-minute safety briefing before getting on a helicopter flight to an oil rig way out in the North Sea currently working for Hurricane Exploration.

An absolutely fascinating trip though, watching the extremes of drilling with a 2.5 kilometre pipe hanging from the rig, housing hugely powerful drill bits and ultra-sensitive electronic measuring equipment.  All in all a very successful and highly educational trip.

Hurricane is a private company that is looking to float in the near future. The breadth and depth of the team’s contacts across the market means we are quite often offered the chance to invest in private companies ahead of their intended flotation on the market.

The current size of our two Funds means we can both get meaningful exposure to a small number of these exiting opportunities - something just not possible for much larger funds.

I must say though, I now look at the train in an entirely new light – even when it’s late.

The results season is in full swing and most companies are largely in line with expectations.  However, we are beginning to see some modest downgrades to expectations for 2012, but that is largely to be expected at this stage of the cycle.

The downgrades are being driven by a squeeze on margins from increased costs and investment, though the latter should in most cases be regarded as a long-term positive.  We currently see no reason to change to our growth expectations, but feel that the market may be expecting a bit too much at the moment.

That said, as an income manger, strong corporate results means I am bullish on the outlook for dividends.

Looking beyond the US’s budgetary issues, which I expect to go right to wire and possible a little beyond before resolution, I have begun to build a holding in Schroders.  I feel that once the current headwinds abate the market will be in a much better position and Schroders is a potential beneficiary from a broad market rise.

I’ve sold Northumbrian Water now that the bid is in place as it’s effectively ‘dead money’ and can be better used elsewhere. We are not expecting a counter bid.