During November the markets reversed some of October’s gains, with the FTSE 100 falling 0.71%. The mid-cap sector continues to be weaker, with the FTSE 250 falling 1.57%. However, neither monthly return figure really captures the essence of what was another volatile period for markets, where falls during middle of the month were in the region of 7%.

The UK and US markets are exhibiting less volatility than Europe; where markets were down 12.4% (in euro terms) at their worst reflecting their position at the epicentre of current issues, although the US VIX (volatility) index remains elevated at levels above 30. Financial markets are in alert mode. Disappointingly, correlations between stock prices remain extremely high with markets trapped once more in a “risk on / risk-off” mentality. Against this background, the Fund delivered a broadly flat return over the month, so gross returns continue to be just shy of 3% for the calendar year-to-date. In what has been an extreme market environment, Absolute Insight UK Equity Market Neutral Fund (“the Fund”) has continued to demonstrate its market neutrality and low volatility characteristics.

Ignoring European events for a moment, the autumn statement from the Chancellor actually contained some positives. Confirmation that growth will be lower in 2012, and consequently net borrowing higher, caught the media’s attention but this was no surprise. The OBR forecast for GDP growth of 2.1% in 2013 may yet prove optimistic, but even if this does slip we should be looking forward to an improved period midway through next year. With the austerity programme well underway, and having gained the confidence of the bond market, the government is beginning to focus on supply-side measures to help ailing parts of the economy.

We are therefore encouraged by decisions to attempt to assist the housing market, retain capital programmes and re-energise infrastructure investment. We are currently building exposure to stocks that we believe will benefit from contract flow out of the government, and can therefore continue to grow in this difficult climate. Babcock is a company which has perhaps the most visibility of government contracts and least competition, with defence being so specialised. We believe the low valuation of the stock therefore looks attractive. A long position in Babcock has been hedged tactically with Balfour Beatty, where there remains a degree of earnings risk in the short term. A less obvious winner of government contract flow is likely to be our long position in RPS, an engineering consultancy which assists with environmental impact and planning for infrastructure projects. This part of their business has recently taken the shine off their strong energy business and the stock trades at the bottom of historic valuation ranges despite an improving earnings backdrop. This position is hedged with FTSE 250 swaps.

In Europe, much of the damage appears to be done to the economy and policy can now only limit some of the nastier consequences. Much of southern Europe is likely to remain in recession next year and will possibly drag down the rest if Germany and France can’t find a resolution. Borrowing costs are rising across the region, creating a negative feedback loop. On the global front this is not all negative since US and UK finance costs have fallen and remain low. So the equity markets are moving to discount a weaker global economy, but not one where the US economy falls back into recession. It’s been clear for a while that global risk appetite is being severely impacted and so we hope that a eurozone solution is found sooner rather than later. In the meantime, we are limiting our risk taking through lower gross exposure in the Fund until volatility and correlations fall.

 The spread betting company, IG group, is noteworthy since high levels of market volatility suit their business, at least in the short term. New customers are tempted by the falls to play the markets, but only those that demonstrate success at trading will last. The remainder are likely to hit their loss tolerance and leave their accounts inactive. So in the short term trading in terms of IG clients has improved, as is highlighted in their recent company statement. Longer term we expect the prospect of IG to replicate its UK success in the overseas markets, but recognise the influence of shorter-term drivers of company profits. We have hedged a position in IG Group with FTSE 250 swaps.

In summary, we delivered a flat month in difficult conditions. The wide range of possible outcomes in Europe continue to justify a cautious investment approach, so our gross investment level remains lower than normal. We continue to prepare for improving conditions as and when volatility and correlations start to normalise down and look forward to updating you further next month.

Please note the value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested.