Political uncertainty in the UK is likely to create volatility for many domestic-focused companies for some time, according to James Zimmerman, manager of the Jupiter UK smaller companies fund. However, the fund’s portfolio shows that investing in UK small caps doesn’t mean being tied to the UK economy.
Following the UK’s decision to leave the EU in June last year, the unexpected outcome of the snap UK general election has only heightened political uncertainty in the UK. This uncertainty is likely to persist for some time. Over the past year, sterling has fallen by more than 10% against the US dollar, and inflation in the UK has overshot the Bank of England’s target rate, hitting 2.6% in June.
A number of more domestically-focused UK shares fell sharply immediately after the EU referendum result and have continued to face headwinds due to sterling weakness and increasing inflation pressures. However, in contrast, many UK-listed international earners have continued to rally, benefiting from the sharp depreciation of sterling over the past year.
Small caps can be global too
The Jupiter UK smaller companies fund was not immune to the sell-off that immediately followed the UK’s decision to leave the European Union; positions in house builder Bellway and the Mortgage Advice Bureau, for example, were marked down severely following the result. However, the fund also has significant exposure to non-sterling revenue and profit generating companies listed in the UK, which has been particularly beneficial across the past year. In fact, a significant proportion of the fund actually has very little to do with the UK economy, and in terms of weighted average revenue generation in the portfolio, only about a third comes from the UK.
The fund’s large exposure to international earners is not a reflection of a bearish view on sterling. It instead demonstrates the confidence I have in the underlying investment theses of a host of companies that happen to earn income outside of the UK, despite being listed in the UK. With diversified geographical end market exposure across the fund, I believe that a significant part of the portfolio is unlikely to be affected by the continued political uncertainty in the UK.
UK-listed, global reach
Since I took over the management of the Jupiter UK smaller companies fund at the start of June 2015, four stocks in particular have contributed to the fund’s strong performance. With the ongoing political uncertainty in the UK, it is interesting to see just how much these strong performing companies differ, both in terms of sector and geographical exposure.
– Burford Capital, the largest litigation finance firm in the world, has rallied 181% in the past 12 months, and has returned 554% over the past two years (in sterling terms). Burford has 94% of its assets in US dollars, and therefore gained significantly from sterling’s sharp fall following the EU referendum. Furthermore, the company has continued to release sets of results far beyond analysts’ expectations. Both the business and the industry are evolving rapidly, and my recent meetings with senior employees have only enhanced my conviction with regard to the company’s long-term prospects.
– Somero Enterprises (+128%), a US-focused manufacturer of concrete levelling machinery, was also among the strongest performing positions over the past two years. Somero has a 99% market share globally in the leading concrete-laying technology, and after recently meeting with the company in Florida, I was impressed by the strength of its ongoing new product development, as well as the strength and longevity of its customer relationships with contractors that buy its equipment both in the US and the rest of the world.
– Fevertree Drinks (+471% in 2 years), the London-based business behind the eponymous premium drinks mixers, has been another notable highlight. After great success in its core tonic water business, the company has recently announced it is to make a push into the dark spirits market, in an attempt to replicate this growth.
– Trupanion (+174%) is one of two non-UK listed holdings in the portfolio at present. It is the second largest provider of medical insurance for cats and dogs in North America, and has also been a particularly strong performer. After recently spending a day with the company in Seattle, meeting their board and a number of employees, I was left with a strong impression regarding the professionalism, culture and the long-termism embedded in the organisation’s psyche, strengthening my conviction in the company as an investment prospect.
Looking to the future
My focus remains stubbornly on selecting management teams whose incentives I believe are aligned with shareholders through high levels of ownership. I study companies with this characteristic and try to uncover managers in the sub-grouping with high levels of competency and integrity. The goal is to back the companies run by exceptional people, but only at attractive valuations where prospective returns are likely to be compelling.
The fund holds companies that I believe have strong competitive positions, which sell products and services that will be required for many years to come. In my opinion, the fund’s holdings have balance sheets that can not only provide a good platform for growth, but also offer the potential to maintain investment through a prolonged economic downturn. My goal is not to take macro-economic bets, so I am careful not to leave the fund overly exposed to specific macro risks. On that note, I believe the fund is well balanced between companies that are global in nature, businesses predominantly selling into the US market, and firms with strong positions in the UK.
James Zimmerman, fund manager, UK Growth strategy, Jupiter AM