Investments  

Fund Review: Jupiter UK Growth fund

The forced selling of assets by banks and pension schemes as a result of ongoing market turbulence has thrown up significant opportunities for Jupiter UK Growth fund co-managers Ian McVeigh and Steve Davies.

Mr McVeigh, who has been at the helm of the £877.8m fund since April 2003, explains that following a “lengthy period of pretty mediocre performance” from equity markets, investors have “marched into low-risk areas”, leaving them lightly exposed to equities and forced valuations lower.

He says: “People have been nervous of holding anything with any volatility, and that is principally represented in areas such as financials. There has been a move into the more safe stuff, such as consumer staples, and that is likely to have left riskier parts of the equity markets looking cheaper.”

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The fund offers investors long-term capital growth through a concentrated portfolio of 30-35 stocks, primarily UK-focused. The fund can invest up to 20 per cent in overseas equities.

Process

The co-managers have three core investment beliefs that form the foundation of the fund’s investment process. Firstly, they believe that companies and economies are often “written off” too readily, thus offering great opportunities.

“Think of banks going into the crisis,” says Mr McVeigh. “They traded at twice book, and people widely believed the ratios were acceptable – they clearly weren’t. One of our best calls was not holding any of that stuff when it all blew up, because they were clearly overgeared.”

Mr Davies adds: “A year ago, we thought the UK economy had been prematurely written off; even then we could see some of the signs like better employment data, et cetera. Sentiment was so poor that things didn’t have to be good, they just had to be less bad. We loaded up with substantial positions in UK banking sector and consumer-facing stocks such as leisure companies.”

The second theme concentrates on the genuine growth prospects of companies. According to Mr McVeigh, these companies are typically faced with the assumption that above-average returns trend down to the average much more rapidly, but he doesn’t subscribe to this. “Take Compass Group, for example, which has got a massive economy of scale through the global reach of its business. If you have got that, it is very difficult to replicate, and therefore high returns stay high for much longer.”

The third part of the process is relatively new, based on lessons learnt from the most recent financial crisis – active engagement with non-executives of companies they are investing in.

“They are the guys that look after your interests, so having much stronger contact there has been something we have been spending time doing,” Mr McVeigh explains.

The managers are disciplined when it comes to selling out of holdings. They spend a lot of time building financial models for each stock in the portfolio and use these to produce their own forecasts. This allows them to set a target price for each stock that once hit means the position is sold.