- Investments in UK banks and other consumer companies has held back recent performance
- The manager maintains his longer-term conviction in these businesses and has added to favoured investments
- Patient investors have been rewarded, although short-term volatility could persist
The UK stock market moved sharp and fast following the EU referendum. Share prices across the board initially tumbled, although some sectors, including domestically-focused areas of the market, suffered more than others.
With its bias towards UK banks and other companies reliant on domestic consumer spending, such as housebuilders, airlines and travel and leisure operators, the Jupiter UK Growth Fund has significantly underperformed the broader UK market in recent weeks. This is, however, over a very short timeframe and should not be seen as a guide to how the fund will perform in future.
On the morning of the vote, Steve Davies, the fund's manager, converted the portfolio's entire cash balance from sterling to US dollars. Combined with some overseas investments (including Apple, BMW, Adidas and Manchester United, which currently account for 10% of the portfolio), this provided some resilience in the wake of the referendum due to the weakness of the pound. However, it did not offset the stark share price falls of many other companies in the portfolio.
Despite the volatility, Steve Davies maintains conviction in these companies and has added to favoured holdings at more attractive prices. This includes domestically-focused businesses such as ITV, Legal & General, Taylor Wimpey and Howden Joinery.
The manager has recently shared his views on two of the main themes represented in the fund:
While UK economic growth is likely to slow, Steve Davies does not anticipate a financial crisis akin to 2008/09. UK banks have strengthened their balance sheets over the past seven years, while banks are required to hold ten times the amount of capital than prior to the crisis, which could help provide some resilience against future economic shocks. Having raised over £130 billion in capital, UK banks should have the flexibility to continue to lend to businesses and consumers even during challenging times.
Lloyds remains the largest investment in the fund; while its earnings may come under some pressure in the shorter term, the manager believes the bank will continue to generate reasonable earnings that should translate into rising dividends over the long term.
Consumer confidence and spending could be dented in the near term. A weakening pound, for example, makes imports into the UK more expensive, which could lead to rising inflation and reduced disposable incomes. In Steve Davies' view, this could be offset somewhat by falling commodity and oil prices, keeping petrol and energy prices lower. He also envisages a cut in interest rates, which should keep household debts manageable.
Key investments exposed to this theme include Dixons Carphone. In the event demand for the retailer's domestic appliances weakens, the manager believes there remains reasons to be positive: the company is expected to benefit from further cost savings from the merger of Dixons and Carphone Warehouse; 30% of revenues come from its Scandinavian operations and, given sterling's weakness, should translate to higher profits when brought back to the UK; the new iPhone could provide a boost to mobile phone sales; and there is also scope to cut marketing costs in the short term. Over the longer term, a joint venture with a US mobile phone store is expected to boost profits.
Our view on this fund
Steve Davies backs his ideas with high conviction. He has maintained the fund's significant exposure to UK banks and other domestically-focused consumer companies despite the short-term volatility in these areas of the market. The fund is likely to benefit if they recover strongly, although the reverse is also true.
The manager is mindful market volatility is likely to persist in the near term, yet he feels the severe share price falls in his favoured companies have been indiscriminate. With valuations now considerably more attractive, he has taken the opportunity to add to favoured holdings.
Over the longer term Steve Davies has demonstrated himself to be a talented stock picker. His contrarian investment approach means the fund tends to be positioned differently to many of its peers and the concentrated nature of the fund means we would expect it to experience periods of volatility as this is a higher-risk approach. We believe long-term investors will be rewarded for their patience and the fund remains on the Wealth 150 list of our favourite funds across the major sectors.