Best In Class 

Best in Class: Jupiter UK Special Situations

Best in Class: Jupiter UK Special Situations

My best in class columns have featured a number of different UK equity funds so far this year: Liontrust UK Smaller Companies, F&C UK Mid Cap and Marlborough UK Multi-Cap Growth.

This week, I've chosen one of the few true value funds left in the market - Jupiter UK Special Situations.

Value-focused managers have faced a difficult environment over the past few years.

As more and more investors have been willing to pay over-the-odds for quality defensives in this extended low-growth environment, stockmarkets have climbed higher, and value opportunities have been squeezed.

Indeed, since Ben Whitmore took on this fund in November 2006, he has faced a style headwind. 

Growth has substantially outperformed value, with the MSCI United Kingdom Growth index returning 104.7 per cent, compared with 67.1 per cent from the MSCI United Kingdom Value index, FE Analytics data for 1 November 2006 to 8 May 2018 shows.

Despite this handicap, he has managed to outperform both – as well as the IA UK All Companies sector – displaying excellent stockpicking skill and returning 170.2 per cent for his investors.

Mr Whitmore has also proved time and again that value investing can add a layer of protection to portfolios when markets turn.

In 2008 the fund fell 20.2 per cent, compared with a sector average fall of 32 per cent, according to data from FE Analytics.

In 2011 the fund remained in positive territory, returning 2.4 per cent, while the sector fell by 7 per cent based on FE Analytics. 

So how has he managed this?

He initially assesses a company's valuation using two screens: the Graham & Dodd and Greenblatt.

The first provides a price to earnings ratio (based on the average earnings over the previous 10 years), to filter out stocks that are lowly valued in relation to their earnings power over a business cycle. He selects those trading at less than 16 times their average.

The second screen then provides a list of companies which have the best combination of low valuation and a high return on net operating profits.

This approach is simple and repeatable, and introduces discipline to the stock selection process.

Mr Whitmore also uses behavioural finance theory to avoid potential pitfalls.

He doesn't attempt to make forecasts at either a macro or company level as he believes that forecasting gives rise to two emotions which should be suppressed – overconfidence and anchoring.

By focusing on a company’s financial data and by using his screens, overconfidence and anchoring in the portfolios can be limited.

He also believes that frequent company meetings can hinder rather than help, as some chief executives emphasise the positive and downplay the negative and, in turn, fund managers tend to believe what they say to reinforce their own views on the company.

To suppress this confirmatory bias from entering his portfolio, Mr Whitmore limits his meetings with companies to occasions when there is a change of chief executive as a new chief executive typically gives more balanced information on the company (weaknesses as well as strengths), rather than just emphasising the strengths.