Harry Hindsight 2007 2nd Half

Another insurer which we exited during the year was the former owner of the iconic 'Gherkin' Building in London, Swiss Re (CH, RUKN). Our entry into the Swiss listed stock was based on our view that the world's largest re-insurer was in an ideal position to take advantage of a robust rate environment. Even more so following the acquisition of GE Insurance Solutions in 2006.

Financial results during the time in the portfolio confirm that Swiss Re was indeed able to make the most of positive underwriting conditions. However, a distinct softening in the medium term outlook for rates was a cause for concern, as was a deteriorating technical picture for the stock.

We also believed that historic probabilities were that a major shock was likely to occur sooner rather than later. Of course the biggest shock, in the form of sub-prime, was to come at the financial division. In November the group announced a 'deeply embarrassing' US$1.1 billion write down on derivatives tied to mortgage backed securities.

Cosmetics and toiletries manufacturer, Swallowfield (SWL), was a niche recommendation that did not lose money, but certainly tested our patience. After an initial honeymoon period in the portfolio, the shares fell precipitously from the start of 2005 until around May of 2006. New management brought in earlier in the year began to drive improvements that in turn saw the share price respond by more than doubling in the ensuing 12 months. However, mindful that consumer spending in the UK was likely to come under pressure, we took the prudent decision to close the chapter on SWL at 88p.

Although our views remain up beat for Japan, there was no disguising the disappointment we felt this year with that country's stock market performance. Lacklustre from a broad perspective, the results were even poorer at the small cap end of the market where the Invesco Japan Discovery Trust (IJD) was heavily invested. Higher volatility and management under performance at the Trust added to our downbeat assessment of IJD. Following the decision by the Trust's Board to reconstruct and then wind up the company, we chose to accept the default cash option and exit IJD for a modest gain rather than roll over into another underperforming Invesco managed Japanese Fund.

Back in December 2004, when we originally recommended specialty chemicals and paints group Imperial Chemical Industries (LSE, ICI), rising raw material inputs and a creaking balance sheet weighed on sentiment. However, we saw things differently. Restructuring programmes targeting millions in cost savings were a welcome step in bolstering margins. Combined with the ability to pass on higher costs to customers, we believed ICI was in a good position to buck market sentiment. This proved the case, with core turnover and earnings growing steadily.

Further restructuring ensued as non-core business units were disposed of. This process gained momentum as 2006 drew to a close with the sale of the 'Uniqema' and 'Quest' divisions for £1.6 billion.

We believed there was now a distinct possibility that a much nimbler ICI could become an acquisition target. After exiting part of the position in 2006 (on concerns that ICI itself could embark on the takeover trail) we maintained a holding for long term gains, given the real chance ICI might be the 'prey rather than the predator'.

And so it was. Rival Dutch coatings and specialty chemicals company, Akzo Nobel, tabled an initial offer at 600p per share in June. This was not sweet enough though, and Akzo returned with a cash offer of 670p.

Given the shakiness of some markets (the US particularly) we saw the plus side of accepting the deal and Members achieved an overall return of 195 percent on their remaining holdings.

Consolidation in the resource sector was a dominant theme in 2007. In the mid cap oil production and exploration space, Burren Energy (BUR) became the target for Italian oil major, Eni SpA. After an initial offer of 1050p per share was turned away, Eni returned with a higher offer of 1230p per that met with the approval of Burren's board. We recommended that Members take profits around 1243p, which represented a modest premium to Eni's offer price.