Jupiter's Steve Davies: UK economy in recovery mode

Kate Marshall | Fri 15 January 2016

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Steve Davies, manager of the Jupiter UK Growth Fund, focuses on two types of investment opportunity:

Growth - companies he believes can generate above-average rates of growth.

Recovery - companies shunned by the wider market but where the manager sees potential for a turnaround.

UK banks are currently the standout recovery opportunity, according to Steve Davies. In his view, the ability of UK banks to generate profits is substantially improving, helped by strict cost-cutting measures, which will ultimately leave them in a position to return some of these profits to shareholders in the form of dividends. Lloyds, Barclays and RBS currently feature in the portfolio. The manager admits these banks have plenty of work to do, but the outlook is much brighter since the onslaught of the financial crisis, while valuations are also attractive.

The fund also maintains a bias to other domestically-focused companies, as the manager feels the UK domestic economy continues to strengthen despite a tougher global backdrop. He anticipates consumer spending will remain robust, amid rising wage growth and falling oil prices. Key holdings include Dixons Carphone, Taylor Wimpey and DFS.

Review of 2015

2015 was a strong year for the fund, returning 4.6% compared with a fall of 1% for the FTSE All Share index, although please remember past performance is not a guide to future returns. A number of UK domestic holdings contributed strongly, including Howden Joinery, Taylor Wimpey, ITV and WH Smith. Avoiding commodities businesses also proved helpful in a difficult environment for the oil and resources sectors.

The fund's cash weighting was also elevated throughout the year – a 10% allocation proved beneficial during the volatility seen in the weeks running up to May's general election. Cash currently stands at 5.5%.

A number of new positions were added to the portfolio last year including DFS, a market leader in sofa retailing. The manager believes future growth should be driven by new store openings and market share gains. He also views the cash-generative company as attractively-valued compared with the rest of the general retail sector.

Other holdings were sold from the portfolio after delivering strong growth throughout their holding period and reaching less-attractive valuations. This includes insurance provider Hiscox and Compass Group, which offers catering and facilities management.

Outlook for 2016

Steve Davies sees four potential issues for UK investors in 2016, and explains how he expects to contend with them should they arrive.

Rising interest rates - In a rising rate environment, the manager expects companies favoured for their defensive characteristics and higher-yields, such as consumer staples, utilities and healthcare stocks, could suffer. Instead he favours potential beneficiaries, such as banks and insurance companies.

Oil price falls - Against a stark fall in the oil price over the past 18 months, Steve Davies expects mining companies will continue to struggle with lower cash flows and the risk of further weakness in China. On the other hand, the travel industry could be set to benefit from fuel cost savings, for example, and the manager is taking advantage by investing in companies including Thomas Cook and IAG (International Consolidated Airlines Group).

Consumer spending - Against a backdrop of wage growth and low inflation, consumer spending could remain robust, with some of the fund's favoured holdings outlined above.

EU referendum - Steve Davies views the EU referendum as this year's wildcard. Both the timing and the outcome are difficult to predict – in the event we get closer to the vote and the outcome is uncertain, the manager will look to increase cash to offer some protection against potential volatility and keep some cash in US dollars in case of sterling weakness.

Performance Analysis

Steve Davies was appointed an analyst on the fund in 2007. Two years later he became deputy manager before assuming the role of co-manager in 2013. He was subsequently appointed sole manager in May 2015.

Since assuming a management role in April 2009, the fund has performed exceptionally well, growing by 204.1%* compared with 112.3% for the FTSE All Share index, although please remember this serves as no guide to the fund's future performance. Our analysis suggests value has been added through good stock selection, as well as prudent sector allocation.

Past performance is not a guide to future returns. Source Lipper IM* to 04/01/2016.

The manager is not afraid to back his ideas with high conviction and this is a higher-risk concentrated portfolio that bears little resemblance to the benchmark. We like this approach, although it means the fund can experience periods of volatility and performance will differ significantly from the benchmark at times. The fund can also use derivatives which can increase volatility.

Our view on this fund

Steve Davies has demonstrated himself as a talented and skilled stock picker. His willingness to back companies underappreciated by the wider market has proven a success over the long term. The manager is willing to increase the fund's allocation to cash when he anticipates heightened market volatility, although the fund has historically tended to perform better in rising, rather than weaker, markets. We expect investors should be rewarded over the long term and this fund features on the Wealth 150 list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.