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Jupiter UK Growth results make grim reading

Jupiter UK Growth has issued its Annual Report & Accounts for the year ended 30 June 2020. This goes into more of the reasoning behind the board’s decision to recommend the liquidation of the trust. There is a final dividend of 5p, down from 8.5p, reflective of income earned.

The chairman opens with “The net asset value total return for our financial year to 30 June 2020 was -27.9% compared with the total return on the company’s benchmark, the FTSE All- Share Total Return Index, of -13.0%. This unacceptably poor performance was caused in part by the impact of Covid-19 in the third quarter of our financial year, when in the space of just 32 days between February 19 and March 23 the FTSE All-Share Total Return Index fell by -33.9%.

The market sell-off was however compounded by further instances of poor stock selection and risk management within the company’s portfolio. These were the same shortcomings which had prompted the board in February to appoint Richard Buxton from Merian Global Investors as the new lead fund manager of the company. Unfortunately, by the time he was able to take effective control of the company’s portfolio, the damage to the company’s asset value had already been done.”

At the board’s request plans were made to transition the portfolio so that it aligned with Merian’s UK Alpha strategy, even though he had still formally to join Jupiter. For a variety of reasons, it was not possible to put this arrangement in place before early April, meaning that day to day management of the portfolio was with the Jupiter Transition Management Team (‘TMT’) throughout the period of market disruption.”

Richard Buxton’s performance, when he finally got his hands on the trust, was in line with the index. Jupiter isn’t charging a management fee this year.

We would like to see a rollover option. The board says “Your board is discussing options with its advisers and establishing the interest of investment managers in offering rollover options. We would also welcome any suggestions that shareholders may have regarding the future of the company. Shareholders can submit suggestions by email to jukg.shareholder@jpmorgan.com.”

Extract from the manager’s statement

Prior to the transition in manager, the company had been positioned for a recovery in UK domestic valuations as political uncertainty diminished and confidence returned, and more generally for a positive turn in the global economy as US-China relations normalised and the benefit of reduced interest rates was felt. This positioning however proved to be highly problematic as Covid-19 took effect depressing the valuations and earnings of cyclically exposed companies and smaller companies globally.

Over the course of the year prior to April, the principal detractors from performance were those companies most exposed to the effects of Covid-19 such as those in the leisure, consumer aerospace and financial sectors. Cineworld was the worst performer in the portfolio during the period as to lockdowns resulted in the closure of all of its cinemas in the UK and US. Additional concerns about its high debt burden were exacerbated by the proposed acquisition of the Canadian chain Cineplex which drove the share price down 85% during the period. The company’s exposure to the wider aerospace sector through aero and auto manufacturer Melrose and airline IAG were also significant detractors as airlines were either required to ground their fleets or did so in response to a collapse in customer volumes. The company has remained a shareholder in both of these businesses due to their strong market positions and positive progress in securing incremental liquidity.

Performance was also adversely affected by the company’s holdings in ITV, Taylor Wimpey and DFS, all of which suffered from lockdown restrictions and from a broader significant reduction in consumer confidence. ITV was forced to cease production of new content at its studios, it lost the opportunity to broadcast sporting events such as this summer’s cancelled European Football Championship and also suffered from a material reduction of advertising spending by other adversely-affected sectors. Both Taylor Wimpey and DFS were forced to close their manufacturing sites and sales facilities. As providers of products heavily reliant on consumer discretionary incomes, both suffered from market scepticism regarding their near-term prospects. The company has retained a holding in Taylor Wimpey reflecting its strong market position, rapid reopening, remarkably strong consumer demand and support from very low interest rates and government action on stamp duty.

The company’s significant holdings in the UK domestic financial sector, which had performed strongly earlier in the year, were also substantial detractors to returns. Here, Arrow Global, a purchaser of defaulted consumer debt, was among the worst performers as pre-existing market concerns regarding leverage met with market scepticism regarding the quality of the assets in a broader macroeconomic downturn. The company’s holdings in Lloyds Banking Group, RBS and Virgin Money also detracted as the regulator required banks to halt dividend payments while concerns rose about earnings and asset quality as interest rates fall and unemployment rises. The company has retained a holding Lloyds Banking Group, reflecting its strong market position and high quality management, and Barclays, where significant exposure to capital markets activity and the US market provide some offset to low interest rates and UK domestic difficulties.

Lastly, prior to the onset of the pandemic, the company’s holding in Sirius Minerals had already adversely impacted performance. Sirius had been seeking to raise $500 million of high yield bond financing from the debt market to unlock a $2.5bn facility from JPMorgan that would have seen the project through to completion. The company announced however that it would not be able to proceed with this offering, which left it with insufficient financing to develop the project. The company was subject to a 5.5p per share offer from Anglo American in January, which was accepted.

Reflecting the wider market, positive contributions to returns were provided by the company’s holdings in technology and growth stocks and overseas stocks, while underweights or void positions in significantly challenged sectors and businesses (oil and gas, HSBC) also provided relative support. The leading performer in the portfolio was Avast, the UK-listed consumer cybersecurity provider. The company was already enjoying a strong year prior to the pandemic as progress in winning new customers and rolling out new products helped to drive strong operational performance. It was also a significant beneficiary of the crisis as those working from home sought additional protection from cyber threats. Relative support was also provided by the company’s holdings in Yum China, Manchester United and Ferrari, all listed overseas. These stocks benefitted from being substantially non-sterling earners during a period in which the pound fell against most global currencies. Having been the first country to be affected by Covid-19, China pursued a very restrictive but regionally-focused and relatively short-lived lockdown. This allowed the country to reopen with confidence earlier than others and consumer activity recovered strongly, of which Yum China was a beneficiary. Although play had not restarted by the beginning of April, Manchester United’s significant commercial, sponsorship and broadcasting revenues were largely unaffected by Covid-19, with talks at the time ongoing to recommence the season later in the year. Lastly, Ferrari’s strong forward order book coupled with its focus on ultra-high net worth customers saw the shares perform relatively strongly.

Performance post manager transition

Since the transition in manager, the company’s net asset value has modestly outperformed the market. The company’s blend of growth and value holdings has allowed it to benefit both from strong recovery among value stocks as government support flowed and societies began to unlock, while also benefiting from growth holdings which have continued to show strong operational momentum during the period and performed well during periods of risk-off sentiment.

The company’s shareholding in Drax has been the largest positive contributor, supported by its ability to maintain its dividend (a rare feat in the prevailing market context) and confirmation of its EBITDA guidance. Another strong performer was GVC which, having performed very poorly on the Covid-19-related disruption, was able to bounce back following a trading update on 6 April which outlined solid revenues and measures to reduce costs and cash outflows and increase liquidity. The company’s continued holding in Barclays has allowed it to benefit from a recovery in the share price on the back of very strong operational performance in its investment bank as Covid-19-related disruption in markets translated into very robust trading volumes.

Among more growth-oriented stocks, Experian continued to perform strongly as demand for its credit data and analytical products remained undiminished by Covid-19. In addition, the company was able to continue to pay dividends during the period. The company’s holding in Sage also performed well, reflecting its significant base of subscription contracts and relatively modest Covid-19-related disruption.

The most significant detractor in the company’s portfolio was travel retail specialist SSP Group. This business was very materially challenged by Covid-19 disruption as it exclusively operates at travel-related sites, particularly airports. In June the business provided an update to the market to the effect that trading during the lockdown period had been even worse than expected in March, but that progress on reducing rent, salary and working capital related outflows had been better than expected. This was accompanied by confirmation that the business had over £750m of available cash and liquidity. SSP Group has an attractive market position and brands, effective management and significant liquidity having already raised cash from shareholders, and we look forward to a strong recovery once Covid-19-related travel disruption diminishes.

Also significantly disrupted by Covid-19, Whitbread was a material detractor to performance. Alongside interim results in May the business announced a c.£1bn rights issue in which the company participated. Although the rights issue was partly defensive, to protect the group against significant outflows during lockdown due to its high fixed cost base, it was also explicitly designed to allow the business to be in a strong position once unlocking begins in earnest to take advantage of opportunities which may arise as other hotel competitors fall into difficulty or sites become available.”

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