Mark Dampier: Backing 'written off' companies can pay, despite the volatility
Friday 21 March 2014
I wrote about the Jupiter UK Growth fund for this newspaper last summer, just after Ian McVeigh celebrated his tenth anniversary as manager. Following another meeting with Mr McVeigh and Steve Davies, the co-manager, last week, I thought it was worthy of another update.
The fund has a strong long-term record, having grown 184 per cent over the past 10 years, against 126 per cent for the FTSE All Share index. Without taking anything away from Mr McVeigh, though, performance has been particularly strong in the past two years, which I believe partly reflects the input of Mr Davies, who was officially named co-manager in January 2013.
Broadly, the managers invest in two types of company: those undergoing a recovery and those they believe are capable of strong growth. The former tend to be companies written off by other investors and often deemed "uninvestable". This immediately causes the pair to sit up and take notice.
They are not afraid to back their favourite stocks with great conviction, and over 90 per cent of the portfolio is invested in just 30 companies. This means each holding has the potential to contribute significantly to performance, but it also tends to make the fund more volatile.
Two-year price targets are set for each stock, which Mr McVeigh believes promotes discipline. This is not to say they will always sell a stock when the target is reached, but it is a signal to review the company and decide if the strong run can continue.
Given the severe UK recession in the wake of the financial crisis, it has not been surprising to see a number of recovery stocks in the portfolio. Dixons has been a notable success. Many thought it was for the scrapheap, suffering from similar problems to HMV. However, the recession saw off competitors such as Comet, giving Dixons the chance to increase its market share. Price cuts and service enhancements also helped and the share price has more than trebled since the mangers first purchased them around three years ago.
The fund's hefty exposure to the UK banking sector has also worked well of late. Lloyds, now the fund's largest position, was purchased in 2010. Initially, this proved painful, but the fund took advantage of share price weakness to increase its exposure. Over the past couple of years that stance has paid off, as sentiment towards the company has markedly improved.
Growth companies tend to be those the managers believe can grow sales at least in line with nominal GDP over a three-year period, which would currently equate to sales growth of around 6 per cent over three years.
Examples of growth stocks held in the portfolio are the information services company Experian, which Mr McVeigh describes as having massive barriers to entry, and the German car giant BMW.
Around 9 per cent of the portfolio is held in cash, which is not necessarily unusual. Mr McVeigh believes valuations are less compelling than they were in early 2012 and, rather like me, felt there was too much optimism in the air at the beginning of this year. The cash gives them the firepower to pounce when they see opportunities.
This fund is likely to suit long-term investors looking for a focused portfolio. This will lead to greater volatility and the fund's performance will differ markedly from the stock market at times. It is a genuine stock-picking fund, though, and one that I believe has been consistently under-rated.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk
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