Jupiter UK Smaller Companies: January 2022 fund update

• Daniel Nickols is an experienced smaller companies investor with over 20 years in the industry
• Nickols considers both bottom-up and top-down factors when it comes to investing in the right companies – a key difference from many smaller companies funds
• Over the long term, performance has been strong but 2021 was a tougher year for the fund
• The fund does not currently feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Jupiter UK Smaller Companies aims to grow capital over the longer term by investing in the big businesses of tomorrow. Whilst small in nature, these companies can play into both domestic and international trends and have greater growth potential than larger, more mature companies. However, investors should be aware that smaller companies are higher risk.

Given its focus on smaller companies, this fund could complement other investments in larger UK or global companies as part of a diversified portfolio.

Manager

Daniel Nickols, Head of Strategy within the UK Small & Mid Cap team at Jupiter, has been the lead manager on this fund since January 2004. A graduate of Cambridge University, Nickols worked for the likes of Morgan Stanley, Deloitte, and Albert E Sharp. With a track record spanning over 17 years on this fund, Nickols has demonstrated his ability to select some great companies.

He hasn’t done this all by himself though. This fund adopts a team-based approach which means Nickols has the support of nine investment professionals including both portfolio managers and dedicated analysts all focused on small and medium-sized UK companies. Longevity is something that sets this team apart from many peers in the IA sector. Nickols, Richard Watts and Luke Kerr have all been on the team since 2001/2002, initially working under the highly regarded investor Ashton Bradbury.

New additions to the team include Andrew Mortimer, who joined as an ESG Investment Director for the UK SMID team and Chrysalis Investment Trust. Mortimer has been with Jupiter since 2015, previously working in the Governance and Sustainability team for five years.

Process

Nickols begins with ‘top down’ analysis of the economy. He and the team assess current macroeconomic conditions and the outlook for economic growth, paying close attention to emerging trends across different industries. They then form a view on which sectors are most likely to benefit based on these factors.

This is then complemented with bottom-up analysis which helps the team identify what they believe to be the best companies within these chosen sectors. The team place significant emphasis on meeting companies, where they form a view on the quality of management within the firm. Businesses must display at least one of three key characteristics to be considered for inclusion in the portfolio. These are: sustained above average earnings growth, ability to deliver unanticipated profit upgrades and the potential for their valuation to re-rate relative to the market.

The team are style agnostic and invest in around 80 companies which can be either in the growth or value camp. This flexibility gives the manager the opportunity to take advantage of style rotations and deliver consistent performance across the market cycle, although this isn’t guaranteed. They find the most opportunities within the consumer discretionary and industrials sectors.

Over the past year the team has invested in more economically sensitive companies to balance out some of their more growth orientated investments. For example, they added car components manufacturer TI Fluids, a company well positioned for the continued transition to electric vehicles and more broadly the recovery in passenger car sales. De La Rue, a leader in polymer products used in banknotes and tax stamps was also added to the portfolio. With a new management team in place and an attractive entry point, the team believe there is significant recovery potential on the horizon.

This fund also invests in unquoted companies, which don’t trade on a stock market. These are higher risk and can be considerably less liquid than those traded on established stock exchanges. This means these positions can be more difficult to sell.

Culture

In July 2020, Jupiter Fund Management completed the acquisition of Merian Global Investors, which Nickols and his team were a part of. It now forms part of the Jupiter Group.

We think the culture within the team is attractive. Fund managers are given autonomy to invest in the way they see fit and believe will benefit investors over the long run, but with an appropriate level of challenge from others in the business. The business setup allows Nickols to focus his time and attention on fund management. Nickols is incentivised based on the performance of the fund which we think aligns his interests with those of investors.

Fund managers receive support from the Sustainable Investing and Governance Research teams. Nickols also forms his own views on ESG (Environmental, Social and Governance) issues and incorporates them into his process, believing them to be important to the long-term quality of a business.

Cost

The fund is normally available for an annual ongoing charge of 1.03%. We negotiated a 0.175% saving though, so it’s available on the HL platform for 0.855% which is around the average for the IA UK Smaller Companies sector. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Nickols has outperformed the IA UK Smaller Companies peer group by some way since he became manager in January 2004. Over this time, the fund returned 1,050.80%* compared with 567.26% for the IA UK Smaller Companies sector average. Our analysis of Nickols’ track record suggests this is largely down to his ability to pick good companies in the right parts of the market. Remember all investments will rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

Historically, Nickols has tended to outperform in both rising and falling markets. That said, over the past year, the fund returned 14.75%, underperforming the IA sector average of 22.90%. We put this down to a combination of weaker stock selection and being overly exposed to the growth style at the start of 2021, subsequently missing out on some of the value rally spurred on by the vaccine announcements.

Several stocks in particular have held back returns over the past year. One of the weakest performers was online clothing retailer Boohoo, which has struggled to cope with rising input prices caused by the pandemic. E-commerce platform, The Hut Group, was another detractor with the market seemingly losing confidence in the business due to governance concerns. Blue Prism, the software company, was another underperformer due to slowing growth which the team put down to underinvestment in the business.

It’s not all been bad news though. Liontrust Asset Management contributed strong returns following increasing assets under management (AUM). The managers remain positive on the company’s prospects with recent acquisitions expanding their product offering and growth potential. Online auction house, Auction Technology Group, a company purchased at IPO has also helped performance with the business transforming the traditional auction room into a digital marketplace.

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2021.

Find out more about Jupiter UK Smaller Companies including charges

Jupiter UK Smaller Companies Key investor information