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.”
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.
Performance
The fund has produced top-quartile returns across all time periods, consistently outperforming both the IMA UK All Companies sector average and its FTSE All-Share index benchmark. In five years, the fund has delivered 64.78 per cent, compared to the FTSE All-Share index return of 51.32 per cent and a peer group average of 49.51 per cent. On a discrete basis, the fund had a difficult 2011, underperforming both the index and the benchmark with a loss of 12.44 per cent, according to FE Analytics.
Mr McVeigh explains: “A lot of guff is talked about in terms of short termism in the City. Equities are long-life assets, and trying to take a longer-term view of two years as a starting point gives you an advantage. We had a poor year in 2011, but the views we had were understood and supported by Jupiter. In 2010 and 2011, the turnover was more elevated than usual, because we were adding overseas names, playing the theme of the growth of the emerging market consumer, and there aren’t many ways of doing that in the UK.”
In spite of the underperformance in 2011, however, this fund has a strong track record and has served its investors well, both in the ups and downs in market cycles.
