Quarterly Investment Report - Qtr ending March 2005

Foreword

Certainly there is never a time where there aren’t positive and negative factors affecting either the global economy, the UK or individual securities for that matter. The art is balancing these “for and against” factors and deciding which is likely to dominate and thus cause downwards or upwards movements in stocks.

Whether our view on future events proves to be well founded or not, it is probably fair to say that the industry consensus would be that over the next couple of years we are looking at single digit returns from all/any asset class.

As we see it, the following are the major positives and negatives affecting individual asset classes/Sterling:

Sterling

Negative: Rising UK inflation. Possible peak in UK market interest rates.

Positive: US$ will have to fall to correct US trade deficit. Weak German economy.

Our view: That the £ will strengthen against the US$ and the Yen and will remain broadly static against the Euro.

Variable interest

Negative: Rising UK inflation. Possible peak in UK market interest rates.

Positive: Rising UK market interest rates.

Our view: Hold existing deposits. Add to cash through asset disposals.

Fixed interest

Negative: Rising UK government borrowing. Rising UK inflation. Rising UK interest rates. Rising US interest rates. Falling Gilt and US Treasury prices.

Positive: Loss of 10% reclaimable tax credit to PEPs and ISAs on dividends. Static US inflation.

Our view: Sell Gilts. Sell quality stock (BBB credit ratings and above) and junk bonds (CCC ratings). Hold 2^nd line fixed interest securities such as Preference shares. Hold bonds rated B to BB.

Equities

Negative: High levels of consumer debt. Loss of 10% reclaimable tax credit to PEPs and ISAs on dividends.

Positive: Expected UK GDP growth in 2005 in the region of 2.5%.

Our view: Sell cyclical stock. Hold defensive stocks.

Index-linked

Negative: Relatively low UK inflation rates. Interest rates expected to rise to curtail credit boom. Rising interest rates will begin to curtail inflation 1 year hence.

Positive: Rising UK inflation.

Our view: Sell index-linked gilts. Buy 2^nd line index-linked securities, hold for a year or so.

Commodities

Negative: Significant rises have already occurred in commodity prices. China’s consumption of oil and raw materials may reduce.

Positive: Increasing demand of late for raw materials especially in growing economies such as China

Our view: Sell. Buy.

Gold and Silver

Gold

Negative: Denominated in US dollars.

Positive: World economic uncertainty. Weakening reserve currency (US$).

Our view: Sell. Buy.

Silver

Negative:

Positive: Increasing demand given increasing applications for the metal. Just off an all time low relative to Gold.

Our view: Sell. Buy.

Property

Residential

Negative: Falling prices in many UK areas. Rising UK interest rates. Historically high UK property values to earnings ratio. Weakening demand in many parts of the UK. Penal UK Stamp Duties. High levels of consumer debt. Rising repossessions. Fall in the number of mortgage approvals.

Positive: Anticipated influx of EU workers into the UK. Possible peak in UK market interest rates. More buoyant private rental sector with First Time Buyers being either unable to get onto property ladder or awaiting a fall in prices at bottom end of market. Boost to housing market expected with advent of new pensions legislation in April 2006.

Our view: Sell residential property, possibly go back into the market in early 2006.

Commercial

Negative: Rising UK market interest rates. Penal UK Stamp Duties. Rising Gilt yields. Weakening tenant demand in certain areas/sectors (retail and manufacturing). Analysts predict little capital growth in the immediate turn. Many investors now committing funds to this asset class.

Positive: Possible peak in UK market interest rates. Expected UK GDP growth in 2005 in the region of 2.5%. Stronger tenant demand in certain areas/sectors (offices).

Our view: Sell commercial property.