The UK Small & Midcap equities team joined Jupiter with the acquisition of Merian Global Investors last year. The “bedding in’’ process has been remarkably smooth, said Richard Watts, Co-Head of Strategy for the team.
“Jupiter is very similar to Merian, with autonomous teams running money according to their own investment process and style. It’s been business as usual – a little more stressful because of the impact of the pandemic on markets but we got through it,’’ said Richard.
Tim Service, Fund Manager, said the desk has benefitted from additional Jupiter resources in areas such as data analytics and ESG (environmental, social and governance) capabilities.
The core of the UK Small & Mid Cap team came together in 2001 and has considerable scale. It manages seven funds including smaller company and mid cap long-only, long/short funds and a UK-listed Investment Trust targeting primarily later stage private companies. Jupiter Fund Manager Matt Cable has also joined the team.
Dan Nickols, Co-Head of Strategy, said small and mid cap returns over the long term compare favourably with other segments of the UK market, with the index now known as the Numis Smaller Companies generating 15% a year on average on a total return basis since 1955. He said this market is often seen – wrongly — as domestically focused. In fact, it is a broad mix that includes disruptive technology and ecommerce businesses, companies that are global leaders in their industries as well as domestically focused and cyclical businesses.
“It is an extremely diverse and quite poorly understood part of the market, but you can consistently add value over and above the index in a way that is harder to do in better understood parts of the market,’’ Dan said. “We benefit from that inefficiency. There’s a lot of diversity, huge numbers of companies to look at, with fewer analysts than in the large cap market, and a constant state of flux due to IPOs and promotions into and demotions from the index. Also, UK small and mid cap indices don’t have the large, dominant sectors as in the FTSE 100 and indices in other countries.’’
There has been a significant uptick in IPOs in the last year. The team invests in only around 5% to 10% of new listings but has increased its focus in pre-IPO and unlisted companies via the investment trust which Richard Watts co-manages that is a holding of the small cap and mid cap funds.
“It’s been a revelation to engage and invest in private companies,’’ Richard says. “You start to realise the true disruptive nature of this market and realise you need to take a 3-, 5- or 10-year view when you position your portfolio.’’
He said early-stage investment with companies allows the desk to potentially benefit from value creation and to gain insight about newer companies such as the digital bank that can provide savings accounts at around a third of the cost of incumbent retail banks. Early engagement also can position the desk favourably with companies that choose to sell shares publicly, he said.
No Brexit cliff edge
Tim said that most UK small and mid caps are trading through any challenges presented by Brexit. “For the vast majority of stocks we invest in, it’s less important than people might think.’’
Covid has brought forward societal and economic changes that are likely to be lasting themes for small and mid cap investors in areas such as digital disruption, ecommerce and increased spending on home improvement by consumers whose savings swelled and workplaces closed during the lockdown, said Dan.
The desk has increased its attention on ESG matters in recent years, including engaging with retailer Boohoo to improve supply-chain accountability and with UK construction companies to recognize their responsibility to fund improvements to building cladding to enhance fire safety.
“Our heritage has always been one of significant engagement with company management teams. We probably meet with 400-500 companies a year and have done that all the way through,’’ said Dan. “The focus is sharpening. At Boohoo, we engaged with the board to make some tangible improvements that are now beginning to come through.
“Housebuilding is another area where we worked very hard,’’ said Richard. “On the cladding issue we felt the obligation to do the right thing. We are large shareholders in these companies. It isn’t just about driving the share price higher. It’s about doing the right thing.’’
The value of active minds: 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
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