Jupiter US Smaller Companies benefits from adjusted investment approach – Jupiter US Smaller Companies (JUS) has released its annual financial report for the year ended 30 June 2018.
Performance
The company’s NAV per share increased by 21.1%, whereas the benchmark, the sterling adjusted Russell 2000 Index returned 14.2%. This outperformance came from the smallest stocks in the portfolio (those under $1 billion in market cap) and stock selection was good in materials & processing, consumer staples, producer durables and technology sectors. Stock selection in health care and energy detracted from performance.
Three stocks contributed especially strongly to stock selection, DMC Global, The Chefs’ Warehouse and Ollie’s Bargain Outlet Holdings.
Portfolio construction review
At the instigation of the board, the investment manager took a close look at the portfolio activity over the previous three years to see if any lessons could be learned. The review suggested that although stock selection had been good, not enough had been held in the best performers, winners had been sold too early and losers had been held too long.
As a result, there were two changes to portfolio construction starting in October 2017:
- the portfolio’s holdings were increased in stocks where we saw greatest long-term potential and sell disciplines were tightened up.
- The portfolio’s weighting in the top ten positions increased from 24% a year ago to 36% at the end of the period and the number of holdings was cut from 58 to 42.
The changes to portfolio construction and sell disciplines had a beneficial effect this year.
Investment approach
The changes in portfolio construction does not fundamentally change the company’s investment philosophy or the way the manager chooses stocks. Robert Siddles, the fund manager commented that the Company takes a conservative investment approach that aims to preserve capital rather than to chase growth. He goes on to say that the approach is not particularly fashionable and does not necessarily produce good results every year but over time it should lead to superior returns and states that “the approach concentrates on taking a long term view of company business prospects and buying shares when they are cheap and have substantial appreciation potential. As a result, the portfolio tends to emphasise areas of the market that are out of favour or where companies have lower risk businesses. Conversely, popular market sectors tend to be shunned and stocks that can offer steady, if unspectacular, returns are preferred. An example of this is companies that can compound growth in book value per share, such as disciplined insurance underwriters.”
Market review
During the year under review, in dollar terms, the Russell 2000 Index of smaller companies gained 16.1% beating the Standard & Poor’s Composite Index which rose 12.2%. The more technology-oriented NASDAQ Composite Index managed the best increase of the three with a gain of 22.3%.
Sterling investors suffered slightly from the weakness of the US dollar, which lost 1.6% in the year. The company’s investments are denominated in dollars but are valued for reporting purposes in sterling.
The US smaller companies sector advanced steadily during most of the year, despite occasional concerns about rising interest rates. Economic activity stepped up in the period helped by the Trump tax cuts and a revival in the energy industry. Corporate profits growth accelerated especially for more domestically focused smaller companies. Pressures from rising labour and logistics costs have begun to appear but so far have not had a significant impact on corporate margins. Despite general economic strength, rising gasoline prices and mortgage rates have been a restraint on growth.
Most indicators of underlying inflation are picking up but have shown only a modest rise. At this stage inflationary wage pressures seem limited to certain geographies and industries where there are labour shortages. The Federal Reserve raised the Fed Funds interest rate three times. The yields on US treasuries increased as well, with corporate bond yields rising further still.
Against this backdrop the best performing sectors were healthcare (biotech was particularly strong), energy and consumer discretionary, whereas the laggards were utilities, financial services, and materials & processing. Value stocks in general continued to suffer in what has now been a 12-year trend of lagging the market (your manager uses a value style of investing).
Outlook from Gordon Grender, chairman
“With the Federal Reserve seemingly intent on tightening policy as well as reducing its vast balance sheet holdings of US Treasuries there is always potential for market disruption. Additional risk comes from slower economic growth abroad should this spill over to the US.
It seems that the Federal Reserve is willing to tighten at a moderate pace so the more domestically focused smaller company market which benefits from a growing economy could continue to rise.
The US smaller company sector is an attractive one and interesting for long term investors. Generally it is under-researched and offers areas of undiscovered value. Shareholders should benefit from the company’s conservative investment approach that focuses on buying good companies when their shares are out of favour.”
JUS : Jupiter US Smaller Companies benefits from adjusted investment approach