Jupiter: UK Small & Mid Cap update: A pragmatic approach to a polarised market

It’s fair to say that 2021 was a challenging year for our UK Small & Mid Cap strategy.

On a stock level, a material amount of the underperformance experienced by the Jupiter UK Smaller Companies fund and the Jupiter UK Mid Cap Fund was due to exposure to THG and boohoo, which struggled for a variety of reasons. THG’s capital markets day in Q4 failed to provide any helpful financial disclosure about its three divisions that could allay bear arguments, while boohoo issued a surprise profit warning due to the inability of its fast-fashion business model to cope with substantially higher global logistics costs and elongated delivery timescales. We expect that these issues will be transient, and both stocks look attractive to us in terms of sales multiples, but the near-term profit impact has been material. It’s worth noting that both these stocks are no longer held in the Jupiter UK Smaller Companies Fund, although they do remain in the Jupiter UK Mid Cap Fund.

Other detractors included Jet2 and Blue Prism. The former underperformed as the ongoing pandemic pushed back recovery for airline stocks, however the cash performance of the business has been strong, with its balance sheet significantly stronger than competitors’. Blue Prism, meanwhile, is no longer held in the strategy after being the subject of a bid from US-listed software business SS&C.

Market outlook: UK consumer spending to rise?

In our view the developed world looks set for a further year of above-trend growth as economies continue to recover from the effects of the pandemic, even as central banks begin the process of policy normalisation. In the UK, while strong levels of nominal wage growth are evident, inflation (driven in particular by utility prices) is such that real wage growth is negative, meaning that the outlook for consumer spending is critically dependent on consumers being comfortable to run down savings from historically high levels. Undoubtedly, certain cohorts will really struggle with cost of living challenges, although the aggregate picture across UK households should look more benign.

In terms of thematic leadership across equity markets, it would seem logical to conclude that the prospect of rising interest rates may, all else equal, pressure the multiples at which longer-duration growth assets trade. To the extent that policy normalisation should be accompanied by still recovering levels of developed world economic activity, more cheaply rated, economically-sensitive businesses should increasingly be capable of delivering to forecast, while trading at multiples from which an upwards rerating can be delivered.

While operating in a rising interest rate environment clearly enhances our sensitivity to the multiples at which growth assets trade, we are cognisant that, in the UK Small & Mid Cap universe, some of the most compelling and disruptive long-term opportunities can be found among growth stocks. We are therefore mindful of the impact of incrementally reducing exposure to growth themes.

 

In our view, therefore, a pragmatic path to consistent relative returns is through building a portfolio that balances growth opportunities (at valuations we can rationalise), with more economically sensitive businesses (where earnings delivery should be underpinned by improving economies and which can be rerated as that earnings delivery becomes visible). It is also important, in our view, not to be so drawn into a factor-based view of the market that one ignores company fundamentals. The vast majority of company updates from positions held in the strategy during the early part of 2022 have been strong, which demonstrates the underlying strength of these businesses.

Simply put, our view is that UK economic growth can be expected to be comparable to the wider developed world, in aggregate, that company earnings forecasts are both realistic and deliverable, and valuations don’t look demanding.

We are trying pragmatically to benefit from the rerating potential of the economically sensitive part of our investment universes, while maintaining exposure to compelling growth opportunities, against the backdrop of a market where, in spite of modest headline multiples, there is still significant valuation polarisation.

Above all, current positioning of the strategy reflects the long-standing principles upon which our investment process is based: marrying an appreciation of the likely set of economic and market conditions we expect to face over the next 12-18 months, while at a stock level alighting on holdings which can at least deliver to forecast.

Past performance is no indication of current or future performance, doesn’t take into account commissions and costs incurred on the issue/redemption of shares.

Source: Morningstar, NAV to NAV, gross income reinvested, net of fees, in GBP, to 31.12.21. The benchmarks are a broad representation of each fund’s investment universe and as such are an appropriate benchmark for each fund to seek to outperform and may also be used as a point of reference against which the funds’ performance may be measured. The funds’ performance may also be compared to their IA sectors, which consist of funds with similar investment objectives and policies. The performance of other share classes may differ, and any reported quartile ranking figures may refer to different share classes. Sector averages and rankings may change at any time.

This document contains information based on the FTSE 250 ex Investment Trust Index. ‘FTSE®’ is a trade mark owned by the London Stock Exchange Plc and is used by FTSE International Limited (‘FTSE’) under licence. The FTSE 250 ex Investment Trust Index is calculated by FTSE. FTSE does not sponsor, endorse or promote the product referred to in this document and is not in any way connected to it and does not accept any liability in relation to its issue, operation and trading. All copyright and database rights in the index values and constituent list vest in FTSE.

 

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Important Information

Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication is issued by Jupiter Investment Management Limited, The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom. Jupiter Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FRN: 171847).

Jupiter UK Smaller Companies and Jupiter UK Mid Cap (“the Funds”) are sub-funds of Jupiter Investment Management Series I, an investment company with variable capital incorporated in England and Wales which is authorised by the Financial Conduct Authority PRN: (467510). The Funds can be distributed to the public in the United Kingdom.

Jupiter uses all reasonable skill and care in compiling the information in this communication which is accurate only on the date of this communication. You should not rely upon the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. An investor should read the Key Investor Information Document(s) (“KIID”) before investing in the Fund. The KIID and the prospectus can be obtained from www.jupiteram.com in English.

RISK FACTORS – Jupiter UK Smaller Companies and Jupiter UK Mid Cap

Investment risk – there is no guarantee that the Fund will achieve its objective. A capital loss of some or all of the amount invested may occur.

Geographic concentration risk – a fall in the UK market may have a significant impact on the value of the Fund because it primarily invests in this market.

Company shares (i.e. equities) risk – the value of Company shares (i.e. equities) and similar investments may go down as well as up in response to the performance of individual companies and can be affected by daily stock market movements and general market conditions. Other influential factors include political, economic news, company earnings and significant corporate events.

Concentration risk (number of investments) – the Fund may at times hold a smaller number of investments, and therefore a fall in the value of a single investment may have a greater impact on the Fund’s value than if it held a larger number of investments.

Liquidity risk – some investments including those in unlisted companies may be hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.

Derivative risk – the Fund may use derivatives to reduce costs and/or the overall risk of the Fund (i.e. Efficient Portfolio Management (EPM)). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Fund. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.

Currency risk – the Fund can be exposed to different currencies. The value of your shares may rise and fall as a result of exchange rate movements.

 

For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.

 

RISK FACTORS – Jupiter UK Smaller Companies only
Smaller companies risk – smaller companies are subject to greater risk and reward potential. Investments may be volatile or difficult to buy or sell.

 

For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.