The Jupiter European smaller companies strategy was launched on February 26, 2020 — an extraordinary time to begin. Portfolio managers Mark Heslop and Phil Macartney discuss what they learned in the last year-plus and where they see opportunities. The strategy aims to invest in high-quality smaller European companies with exposure to long-term secular growth trends and the ability to compound shareholder value.
Tell us about the first year — it was dramatic — did it validate your investment thesis and process?
Obviously, we had no foresight of the challenges that lay ahead when we launched. But our approach of investing in the highest-quality companies held us in good stead over the last year or so. Top-quality management teams, superior business models and strong cash generation are what you need when markets become challenging. These are fundamentally lower risk businesses than the broader index.
Also, the Jupiter European Growth team (Mark Nichols, Mark Heslop, Phil Macartney, Sohil Chotai, Nikisha Mistry) has in aggregate experience of over 60 years, and so seemingly existential crises and extreme market turbulence are not new to us. Having the ability to assess what the implications are for each of your portfolio constituents and a consistency in process are critical to survive and hopefully thrive in these periods.
We believe our focus on secular growth rather than short-term cyclical growth also helps. Secular growth may be deferred but doesn’t disappear. Indeed, for some of our companies, the growth opportunities that we sought exposure to have been accelerated by the pandemic. Examples of this include online consumption (Avanza), digital solutions (VAT Group, Hypoport) and efficient diagnoses (Diasorin, Stratec).
Having come through the volatility of last year, how do you view the market outlook?
With the funds we will do our best to stay calm and carry on. We don’t have a crystal ball telling us how policy makers or markets are going to react, but we think it probable that while near-term activity will clearly improve, the medium-term economic outlook, with or without inflation, remains incredibly challenging. At some point debts will have to be repaid and belts will have to be tightened, while excess capacity will constrain pricing power for many. Companies that have differentiated products and sustainable competitive advantages are well positioned to weather the turbulent times. An example of this may be Somfy, a leading player in the automated awnings space. The company has a high market share in this area but increasing digitalization and a greater focus on building energy efficiency is making its products ever more sought after. Its strong brand resonates highly with the installers of this product, creating a high barrier to entry and increased pricing power. The crisis for them lasted all of two months before demand returned, taking share from their competition who were not so well prepared.
Does the strategy have exposure to the economic recovery?
The vaccines, so far, have proven highly effective at reducing the rate of transmission and a broad re-opening across Europe seems relatively imminent. We expect this to result in a rapid snap back in activity, supported by high household savings rates and accommodative monetary policy. While our process leads us to structural growth opportunities, some of our holdings will also clearly benefit from an economic re-opening. Two examples of this are CTS Eventim and Marr. CTS Eventim is Europe’s leading ticketing company for live events. Structurally it is a business that is benefiting from a shift to online ticketing, industry consolidation and growing demand for live entertainment. Clearly 2020 has been a year to forget for the industry. That said CTS Eventim has probably seen a further improvement in its market position and will clearly benefit from the enormous pent-up demand for live events. Marr is the leading Italian food distributor for restaurants and hotels. Not only will Marr see a rapid recovery in activity as Italy begins to reopen, but it is likely that the ongoing industry consolidation will accelerate as weak competitors become increasingly prepared to throw in the towel. We believe both companies to be long-term structural winners but also give us direct exposure to re-opening.
Phil, you joined the Jupiter European equities team in September and in February became co-manager of the European smaller company strategy. Previously, you were managing UK equities. Why did you make the switch to European equities?
I made the switch from Europe to the UK in 2015 and so, in many ways, this is me returning to my roots. Personally, I was finding it harder and harder to get exposure to the global themes and structural growth in a narrow market such as the UK. The deeper European market allows investors to cast a wider net and gives more potential to find these market-leading companies. I was also finding the UK to be quite a saturated market when it comes to research and understanding of companies, which ultimately creates more efficiency in the market. One of the main attractions regarding Europe is that there are, and will remain, many companies that are less well understood, allowing active managers with intellectual curiosity to find greater opportunities.
What does SFDR (Sustainable Finance Disclosure Regulation) mean for the strategy?
ESG (environmental, social and governance) issues are grabbing a lot of headlines at the moment and driving some significant changes in financial markets. We support the regulators’ desire to improve corporate and fund disclosure as ultimately this should support a general improvement in corporate behavior with regard to their responsibilities to people and the planet. SFDR obliges fund managers and financial advisers to disclose information on a range of ESG considerations. The level of disclosure will depend on a fund’s classification, which in turn depends on a fund’s objectives and ability to make the relevant disclosures.
ESG research and corporate engagement is at the core of our investment process. A key characteristic that we look for in a company is sustainability. To be clear, we would not describe ourselves as ‘Impact’ investors, but we are looking to own companies with strong corporate governance and companies that consistently seek to meet and beat best practice — these are likely to be the companies that will maintain their market leadership.
We firmly believe that our funds and investment processes are aligned with the spirit of ‘Article 8 Funds’ i.e., funds that promote environmental and social characteristics. That said, we are in the early days of this new regulation and not all of the disclosure requirements are entirely clear. We have taken the prudent approach and filed our funds under Article 6. Over the coming months we will continue to work closely with our ESG, compliance and data science colleagues to further ensure that we are in a position to fully meet the regulatory requirements and hope to move the funds to Article 8 later in the year.
Has the team always run money in the way it does now?
Investment philosophies and processes tend to evolve – we are constant students of the market. But what we truly believe in is that if you can identify great franchises, that have high barriers to entry, create great products for their customers and run their business with a laser focus on cash and returns and can buy them at prices where the market under appreciates these aspects, you stand a very good chance of making outsized returns. Time has also taught us that you only have a finite amount of intellectual capital to spend – so spend it wisely. By concentrating portfolios, you not only have a greater opportunity to understand your companies and their markets more intimately, but we fundamentally believe you reduce portfolio risk though your understanding of specific business risk.
Finally, if you had to name one, which holding excites you most?
We think they’re all great companies and picking one is like being asked to pick your favourite child! It’s more akin to a sports team, where to win you need all players to perform over time but having the odd superstar can make your chances just that bit better. We would call out VAT Group – the Swiss market leader (by some considerable distance) in the vacuum valve industry. Their valves are predominately destined for the semiconductor manufacturing industry, where vacuums play one of the most important roles in the creation of a semiconductor chip. Without a “pure” vacuum, creating the technology we all love and use today across many aspects of life would be impossible. The business invests relentlessly in R&D, focuses on cost reduction, and efficiently allocates capital, meaning their position in this fast-growing market is being strengthened.