Jupiter UK Growth’s domestic bias holds back performance – In its annual report for the period to 30 June 2018, Jupiter UK Growth Investment Trust (JUKG), the company reported a rise in its NAV per share (total return) of 4.0%. The company’s reference index, the FTSE All Share index returned 9.0% on the same basis.
Performance
A number of holdings were subject to mergers and acquisitions activity over the year, which was the the benefit of the performance of the NAV. However, this was offset by the performance of domestic sectors, where the investment manager finds investment opportunities.
As the chairman put it: “With Brexit D-Day approaching, and the political dynamics surrounding the negotiations with the EU still complex and volatile, the domestic sectors of the UK stock market remain deeply unpopular with international investors. As this is the sector in which our manager concentrates most of his firepower, this has not been the easiest period in which to be managing a UK growth and recovery portfolio.”
The portfolio also had a lower weight in the resources sector, when compared to the reference index. This was a detractor to performance as these companies performed relatively well.
Outlook from Steve Davies, the investment manager
“We are halfway through 2018 and already this year five of the holdings in the company’s portfolio have been taken over or received formal bid approaches. Given the company’s portfolio only holds around 30 sizeable positions, that is an unusually high hit rate. Why has this happened, and can it continue?
The first point to make is that the UK is still deeply unloved by global investors. Sentiment, as measured by BAML’s Global Fund Manager Survey, is the worst it has been since 2008, when the UK’s banking system was on the verge of collapsing. In one sense, that attitude is perfectly understandable given the political and economic uncertainty affecting the UK, but it also means that there are some very lowly-valued stocks on the market.
On top of this, I believe the UK stock market has become very myopic, focusing on current-year earnings and heavily punishing those companies that are investing now to drive growth and profits over the medium term. My investment time horizon is longer than this, usually 2-3 years and often further, and so I see plenty of valuation anomalies at present. Other investors, such as private equity or corporates will also tend to operate on longer timelines and this is why they are willing to pay higher prices than the market in M&A deals.
The role of luck should not be overlooked in all this. James Moir (who joined the team as an Equity Analyst at the end of 2017) and I do lots of work trying to identify companies which we think the market is undervaluing, but it still requires a real bidder to make an actual approach and that is much harder to predict. At the start of 2018 I had my own list of likely M&A candidates in the company’s portfolio and, while GKN and Inmarsat were near the top of that list, ZPG and CityFibre would have been much lower down.
If, as seems likely, the UK remains out of favour among global investors for some time to come, then the UK market may see plenty more M&A activity in the second half of the year. We believe our strength in individual stock-picking and our focus on companies with strong cashflows leaves the company’s portfolio well placed to benefit, but, as noted above, there is also an element of luck involved too.”
Rollover of Jupiter Dividend & Growth Trust
Following the liquidation and rollover into JUKG of Jupiter Dividend & Growth Trust , which reached the end of its fixed life in November 2017, £24.6 million in new shares at 315p per share were issued, increasing the company’s net assets to £66.7 million (as at 31 December). The chairman note that this represented an important step towards the board’s stated objective of growing the company’s asset base to plus of £150 million.
JUKG : Jupiter UK Growth’s domestic bias holds back performance