Merian UK Mid Cap – August 2020 fund update

Jonathon Curtis | Wed 19 August 2020

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• Merian was recently taken over by Jupiter Asset Management but Richard Watts will continue to run the fund the same way
• Watts’ long-term track record is strong
• Recent performance has been volatile although the fund has held up better than the benchmark
• This fund is not on our Wealth Shortlist, a list of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Merian UK Mid Cap aims to provide long-term growth by investing in medium-sized UK companies. The manager has a more adventurous approach than others investing in UK ‘mid cap’ companies. This means the fund could be used to help bolster growth potential of the UK portion of a portfolio as long as investors can tolerate the added volatility. It could also work well alongside funds focusing on large UK businesses to provide broader exposure to the UK stock market.

Manager

Richard Watts has been the lead manager of this fund since the end of 2008, having been co-manager since 2006. It’s the only fund he runs so he can completely dedicate himself to it.

Watts began his investment career in 1998, and previously worked for PricewaterhouseCoopers, Orbis Investment Advisory and most recently Merian Global Investors. Merian was recently taken over by Jupiter Asset Management and so Watts joined Jupiter in July this year.

Many other Merian smaller companies fund managers joined Watts in moving to Jupiter, such as Dan Nickols and Nick Williamson. They’ve all worked closely together for many years, and offer support and challenge to each other. We hold the team in high regard and consider them to be one of the strongest small and mid-cap teams in the UK.

Watts’ long-term track record is strong and we think he’s a skilled manager but remember this should not be seen as a guide to the future. We’d prefer to wait until the dust settles from the Jupiter takeover before making any decisions on whether the fund should be considered for the Wealth Shortlist.

Process

Watts invests in medium–sized UK companies and combines analysis of businesses with his views on the economy to build the portfolio. He also has the flexibility to invest in higher-risk smaller companies and operates a concentrated approach, which adds risk. He assesses a company’s profile, its financial position and management team to select those he thinks have the potential to deliver long term-growth. When considering the economic landscape, he evaluates economic growth, interest rates, extreme events and industry trends.

Many of the companies Watts currently invests in are ones with high-growth expectations. He likes to maintain some balance in the portfolio though, so he also invests in so-called ‘cyclicals’ – companies whose fortunes tend to be tied to the ups and down of the economy – and more domestically-focused names. Overall though, the fund currently has more of a growth bias, as Watts thinks the pandemic has accelerated many of the changes that were already benefitting many ‘growth’ companies, such as the rise of online retail and technology platforms.

Watts took advantage of the steep UK stock market falls in February and March, and invested significantly in online retailers Boohoo Group and Asos, as well as digital advertiser and marketer S4 Capital. He sold easyJet and invested in another airline, Wizz Air. It mainly serves Eastern Europe and Watts thinks Wizz Air will emerge stronger from the pandemic as competitors with higher costs suffer.

The portfolio currently contains a small number of unquoted companies – those not listed on any stock market. Unquoted companies are harder to buy and sell (less liquid) than ones listed on a stock market, which makes them higher-risk. The largest of these positions is online health and beauty retailer The Hut Group at under 4% of the fund. Watts has committed to not invest in any more unquoted companies or add to any of the existing positions, and intends to sell them over time when the opportunity arises.

Culture

Merian Global Investors was recently acquired by Jupiter Asset Management, and many Merian funds have moved across to Jupiter. They’ll be run with the same investment approaches and by the same fund managers as they were before, which we view positively, and for now will keep the Merian name.

We think the culture at Jupiter is attractive, and in many ways is similar to the culture at Merian. Fund managers are given autonomy to invest the way they see fit, but with an appropriate level of challenge from others in the business. Watts remains incentivised to focus on long-term performance, and so he’s aligned with long-term investors in the fund.

Any takeover has the potential to cause disruption though. As things stand we’re comfortable with how the transition from Merian to Jupiter has gone, but it’s something we want to keep an eye on in case there’s any further change.

Cost

The standard fund charge is 0.85%, but we’ve negotiated a lower annual ongoing charge of 0.775% for HL clients. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. This is one of the lowest charges among UK mid-cap funds. The HL platform fee of up to 0.45% per year also applies.

Performance

Since Watts took over the fund in December 2008 it’s grown 356.6%*, compared with 259.5% for the FTSE 250 (ex investment trusts) index. Remember past performance isn’t a guide to the future. Our analysis suggests he’s shown skilled stock-picking regardless of a company’s size or sector, although he’s enjoyed the greatest success within the non-essential consumer sector, particularly in recent months.

During Watts’ tenure as lead manager of the fund, he’s generally done better than the benchmark in rising markets but has usually fallen further during market wobbles, making the fund more volatile than the benchmark.

That’s been the case even more so over recent months. Part of that volatility is down to the fund’s current largest holding, Boohoo. Its share price leapt as markets began to recover from mid-March, but then came tumbling back down following allegations that one of its suppliers was paying staff less than the minimum wage. At one point Boohoo made up 12.5% of the portfolio, but due to the share price falls it’s now less. It’s still a substantial holding though as Watts believes the long-term potential outweighs any short-term negative issues. He’s also encouraged by the steps the company has taken to improve its supply chain. Nonetheless, he’s committed to trimming his position in the company so it doesn’t make up such a large part of the portfolio.

Despite the volatility, the fund has held up much better than the benchmark during the past 12 months, although that’s a very short period time over which to judge performance. We think Watts has the ability to continue delivering strong long-term returns, although there are no guarantees.

Richard Watt's track record

Past performance is not a guide to the future. Source: Lipper IM* to 31/07/2020.

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2020.

Find out more about Merian UK Mid Cap including charges

Merian UK Mid Cap Key investor information