Jupiter UK Growth - a high-conviction portfolio of UK companies

Kate Marshall | Thu 02 June 2016

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• Investments in UK banks and a lack of exposure to the energy and mining sectors has held back recent performance
• The fund maintains a bias to UK domestic-facing businesses that could benefit from increased consumer spending
• Steve Davies’ high-conviction approach has proven rewarding over the longer term

There has been a change in the dynamic of the UK stock market so far in 2016. The energy and mining sectors, which posted heavy losses last year, have seen a reversal in their fortunes since February. On the other hand, consumer goods businesses have recently delivered subdued returns following an impressive 2015.

This stark difference in performance has affected funds skewed towards, or away, from these sectors. Avoiding commodity-related businesses, for example, proved rewarding for the Jupiter UK Growth Fund last year. Yet this positioning has acted as a drag on performance so far this year. Steve Davies, the fund’s manager, continues to avoid these areas of the market, however. He believes they will continue to suffer from a reduction in China's demand for natural resources.

Elsewhere, a number of investments in UK banks recently hurt performance, although Steve Davies maintains his longer-term positive outlook for the sector. 17% of the fund is currently invested here, with high-conviction investments in Lloyds (7.8%), Barclays (4.6%) and Royal Bank of Scotland (3.4%). In the case of Lloyds, for example, profits have continued to recover in recent years, while costs have been cut. The manager also expects the bank’s dividend payments to increase markedly over the next 18 months.

The fund also maintains a bias to other domestically-focused companies, which Steve Davies expects will benefit from robust consumer spending amid falling unemployment and rising disposable incomes. Current holdings exposed to this theme include Dixons Carphone, WH Smith and Thomas Cook.

Outlook

The manager is conscious the upcoming EU referendum could create volatility within the UK market. He is prepared to be flexible in the event a ‘Brexit’ looks likely as we approach voting day. While he already utilises his flexibility to invest up to 20% overseas – 9% of the fund is currently invested in US and European companies – this could increase further. Secondly, the manager suggests the fund’s cash level could increase to 10% (currently 4.3% ). He also has the ability to hold some cash in US dollars in case of sterling weakness. Finally, he is willing to reduce exposure to UK domestic-facing businesses.

Our view on this fund

In the short term, the fund’s performance has been held back by its relatively high exposure to the banking sector and lack of investments in the oil and mining industries. However, Steve Davies has demonstrated himself to be a talented and skilled stock picker over the long term. Since he assumed a management role in 2009, the fund has grown 186.9%* compared with 132.8% for the average fund in the sector, although please remember past performance is not a guide to future returns.

Source: Lipper IM *to 01/06/2016. Past performance is not a guide to the future.

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. We expect long-term investors should be rewarded and the 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.