2020 has been an incredibly challenging year on both an economic and human level. The emergence of Coronavirus impacted families and society on a level no one could have anticipated.
In terms of financial impact, this year has been incredibly tough as value investing surpassed its worst period of underperformance over a rolling 5-year period in August. At the time, value was underperforming growth by a staggering 15% per annum over 5 years. This level of underperformance led to value fund and boutique closures with managers leaving the industry.
It has been the worst period for this investment style since at least the 1930’s, meaning clearly that no managers currently investing have been through this level of underperformance. This has led to a lot of soul searching; questioning; reviewing the process; going back to the value books and digging out fund reports from 1999; The Tech boom, which was the last time value had an extremely poor period of performance. Of particular issue has been that in all six of the previous calendar years with negative market returns (2000,2001,2002,2008,2011,2018) the funds I have been running have outperformed the broad indices. This is the first calendar year of negative returns when our style of investing has done worse in a falling market.
It has certainly been my most challenging year yet. If someone had said to me in 2000, that in my career I would experience a period of even greater underperformance of value, I would not have been able to see how that was possible. But here we are. This has been tough for us, but more importantly for you, our clients. We appreciate your patience and sticking with the strategy through these difficult and uncertain times. We do not take this for granted. Our aim is to provide you with good long-term performance, and we are disappointed that this year we were unable to deliver this.
At the start of the year Ellen Mann and Brian McCormick both joined the team. They bring different perspectives and backgrounds which we believe strengthens the team.
Review of the year
At the start of the year value was already significantly underperforming growth. The emergence of Covid-19, which caused significant shock around the world and stock market falls, exacerbated the trends that we had already been experiencing, and the pace of value underperformance accelerated.
Following the brutal market fall in March we spent the next few weeks reviewing our holdings. In periods of stress, the number one thing companies do is fall back on their cash position. In our strategy we have always emphasised the importance of balance sheet strength. We want businesses that do not need to call on their equity shareholders to put up more cash. If companies do not have cash, their competitors can take advantage when things improve. These companies are more likely to emerge stronger. Over this year, we are pleased to report that none of our holdings raised equity. However, there were significant dividend cuts.
We have made some changes to the portfolio by selling some franchises where we think that we can replace them with stronger franchises that have also fallen sharply. For example, we have sold out of M&S, ITV and Capita and initiated holdings in Booking Holdings, Airbus, Taylor Wimpey, Forterra, IMI, M&G and Kingfisher (addition). Overall, these trades, and the reduction of cash and Barrick Gold have significantly contributed to fund returns when compared to a portfolio at the start of the year with no trades. The new holdings have been sharply hit by coronavirus, especially the two travel related companies, but there are no fundamental concerns around the businesses. It is more a question of when demand recovers for their products rather than if it does. Four of the businesses have net cash balance sheets.
Why has value performed so badly – Is value investing broken?
Considering the level and length of underperformance, this is question we have been asking ourselves regularly. We believe there are a few current concerns around value investing;

Digital Revolution. We have seen staggering success from Apple, Microsoft, Amazon, Facebook, Alphabet, Netflix, Tesla, Visa and Alibaba. The giant tech names have propelled the market higher, predominantly in the US and China. These tech names seem to have created monopolistic profits that people believe are permanent and do not think other companies can break into. As such there is a belief that there will be no mean reversion. If we look at the previous 4 decades at the start of the decade, the markets have been dominated by particular themes; In the 1980, of the top 10 companies, six were related to oil; 1990’s eight were related to Japan; 2000’s they were all tech names (some still thriving, some have disappeared); 2010’s companies its exposure to China and in 2020 its dominated by the tech giants. The market is assuming the 2020 picture is frozen and there will be no more disruption or change. If we look at history, typically only two of those top 10 names remain in the top 10 over the decade; and those top 10 underperform the market over the next 20 years. This time people think that will not happen and those growth companies will always win. We do not believe that this level of dominance, concentration and extremely high valuations can remain indefinitely.

Low Interest Rates. Low interest rates favour high growth companies. This is because the discount rate is lower for companies which have profits that are further out in the future, therefore assisting the valuation of growth companies. Low interest rates also assist financing for companies as the cost is lower. The current market view is that interest rates will stay low for a very long time. We believe that this is difficult to be certain about. Forecasting is inherently difficult, and we therefore cannot assume rates stay low for the very long term.

Disruptors. There is a view that there is a heightened level of disruption within the market, particularly coming from those technology names. However, we are strong believers that there has always been disruption, for example, the emergence of penicillin, computers, low cost airlines, roads, mobile telephone, and the iPhone. We have also seen the collapse of ship building, video rental and shopping centres. There has always been disruption which has created opportunities. It might feel heightened now, but it has always been there. As investors it is our job to analyse the survivability of companies and industries that have been disrupted

We do not think any of the above issues render value completely broken and that ultimately the market will go back to being valuation led.
The evidence shows that most of the underperformance of value as a style has been accounted for by a collapse in valuations applied to these lowly valued shares rather than a collapse in relative profitability. We have spoken at length on these issues in our November 2020 webcast. However, we have paid particular attention to the quality of the franchise and the potential disruption to the business from industry and societal changes. Where we have an investment that is in an industry undergoing change we have ensured the business is embracing the change, for example VW has placed a very large bet on battery electric vehicles compared to many other car companies, and is already exceeding Tesla’s market share in several European countries.
Attribution and shape of performance
The main contributors to the performance of our UK Value strategy were Barrick Gold, Kingfisher, Anglo American, Pearson, Taylor Wimpey and no holdings in Shell and HSBC. Conversely the main detractors were Capita, Babcock, TP ICAP, BT and Standard Chartered and not owning Rio Tinto. We have reduced our holdings in Barrick, Kingfisher and Anglo American and we cut our positions in Capita and Babcock. Conversely, we have added to TP ICAP and BT.
The MSCI United Kingdom Value Index fell by 19.8% and the MSCI United Kingdom Growth Index fell by just over 1.5%. This compared to a FTSE All-Share Index return of -9.7%. This value headwind was also a significant contributor to performance.
Our UK Value strategy significantly outperformed the FTSE All-Share Index in Q4 2020, but still finished the year behind the index. Positive results from multiple Covid-19 vaccine trails in November triggered one of the sharpest rotations from growth to value on record. This created a large tailwind for fund performance with the MSCI United Kingdom Value Index returning 3.9% more than the FTSE All-Share Index during the quarter. In our view the two most important points to note about Q4 performance are: 1) It shows very clearly that the fund is well positioned to benefit from any improvement in the fortunes of value investing as a style and 2) Although the rotation from growth into value was sharp and dramatic (virtually all of the performance was generated across just 6 trading days), when viewed through a longer-term lens it barely even registers. For example, the MSCI United Kingdom Value Index was still 10.1% behind the FTSE All-Share Index across 2020 as a whole, inclusive of the strong finish to the year.
Stewardship and the importance of engagement

Our process is fairly differentiated in that we do not think meeting company management is crucial. We rather emphasise the numbers and the business as opposed to too much emphasis on the management narrative. Where we do think meeting management is absolute critical is from a Stewardship perspective, this include meeting non-executive Directors and Chairperson as strategy and views tend to be more objective and long term. So, whilst we do not have to meet all CEOs or FDs, we absolutely do want to meet management to discuss ESG and stewardship. Last year we published an article going into more depth about our approach to ESG engagement, including some case studies. This year we have engaged with 100% of our investee companies and voted at all resolutions.

This period has been particularly disappointing as all the other years I have been managing value funds the style has outperformed in down markets. This year has been exceptionally challenging for value investors, and whilst we are in the worst period for value underperforming growth and it’s been very painful to get to this point, if history is to be believed, now could be a very good entry point for someone looking to invest in a value fund.
Please note
Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
Fund-specific risks

Jupiter Income Trust: The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. All of the fund’s expenses are charged to capital, which can reduce the potential for capital growth. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.

Jupiter UK Special Situations: The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. This fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.

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