Dan Nickols and Richard Watts, who lead Jupiter’s UK Small and Mid Cap equities desk, consider the potential opportunities for investors with the UK economy poised to reopen and a busy market for new stock offerings. Dan manages the Jupiter UK Smaller Companies Fund, and Richard manages the Jupiter UK Mid Cap fund.

In the space of a few months, the combination of Britain’s “skinny’’ trade deal with the European Union, the publication of data showing the efficacy of Covid-19 vaccines and the so-far very successful rollout of the vaccinations have boosted optimism about an economic recovery.

 

This improves considerably the backdrop for investors in UK equities — and in the shares of small and mid size companies in particular. UK equities have been shunned by global investors since the 2016 Brexit vote, leaving the London stock market trading at a discount of 18% vs Europe and a whopping 38% to US equities1. This “uncertainty’’ discount is likely to unwind.

 

The government’s “roadmap’’ for a gradual lifting of the lockdown restrictions is a positive sign as is the Chancellor’s continued support for businesses. The Brexit agreement, while not ideal, allows the country to pursue trade agreements outside Europe. Sterling, an arbiter of sentiment during the Brexit talks and a key indicator of the economy’s prospects, has moved steadily higher against the dollar and euro this year.

 

1Source: Refinitiv Datastream via Peel Hunt

`Coiled Spring’

To be sure, the UK economy contracted dramatically last year and has a lot of ground to make up. The successful vaccine rollout has stock markets looking forward, however. The Bank of England has forecast a rapid second-half recovery, with the bank’s chief economist, Andy Haldane, likening pent-up demand from the lockdowns to “a coiled spring.’’

 

A by-product of the last year has been that many people are, paradoxically, better off financially — at least those whose jobs have been protected or who could continue working. The UK savings rate is around 16% versus a mid- to low-single-digit rate historically.

 

Pent up demand lifted the London initial public offering (IPO) market starting late last year, and it continues to accelerate. IPOs are a particular characteristic of the midcap and small cap markets, adding new opportunities for investors and dynamism to the indices.

 

 

More IPOs

The Jupiter Smaller Companies Fund has taken part in five IPOs so far this year: Bytes Technology, the software reseller; MoonPig the gift card printer; Supreme, a seller of vaping products; Foresight, a specialist fund manager and Auction Technology Group, the online auction marketplace. The Jupiter UK Mid Cap Fund also took part in the offering of footwear maker Dr Martens. Another half a dozen planned flotations are under consideration by the team.

 

Some additional details on the respective positioning of the funds:

 

 

Jupiter UK Smaller Companies Fund

The portfolio is positioned to have a balanced approach between disruptive growth companies that thrived before and during lockdown, and cheaper, economically sensitive businesses that can participate in the value stocks rally — the so-called back-to-normal trade.

 

In addition to the new positions in tech companies such as Bytes, since the lockdown in the Spring of 2020, the fund has selectively been adding exposure to UK domestically exposed businesses that are sensitive to economic cycles and therefore should benefit from a recovering UK economy; examples include the pubs groups Young’s and Mitchells and Butlers, airline and tour operator Jet2 and specialist lender, One Savings Bank. The fund also has retained its positions in online clothing retailer Boohoo, which continues to grow exceptionally strongly, and Dunelm, the homewares retailer that has successfully expanded its multi-channel proposition, with strong online growth now complementing store sales.

 

The Jupiter UK Smaller Companies Fund trades at a price that is 19-times estimated earnings in 12 months — a premium to the index, which trades on a multiple of 14.5-times. This reflects the fund’s larger holdings of dynamic growth companies.

 

 

Jupiter UK Mid Cap Fund

From a positioning perspective, the Jupiter UK Mid Cap Fund continues to complement an overweight tilt to more expensive, often disruptive, structural growth companies, with exposure to enough well-managed, conservatively financed, less expensive, more economically sensitive businesses, to ensure that the fund should be defensively positioned against any continuation of the value rally.

 

Reflective of confidence in a consumer-led rebound in activity the fund has continued to add cyclicality, largely domestic, while also reducing exposure to more defensive assets. During January, the fund increased its domestic cyclical exposure by adding to a holding in sausage-roll maker Greggs, and starting a small position in building products company Grafton, in addition to participating in the Dr Martens IPO. The fund is overweight the UK.

 

The fund remains overweight to online retail through holdings such as ASOS, Boohoo and The Hut Group. We think there is a potential to underestimate how online retailers perform in recovery. Using the UK clothing market as an example, whilst the pandemic has accelerated the increase in online penetration it has also meant that in total spend terms the overall market declined significantly. Reopening should drive a material increase in activity which, in turn, should be the catalyst for UK consumer spending on clothing to increase back to pre-pandemic levels. We believe this end-market growth should enhance the growth prospects of certain online retailers.

 

The fund trades at a price multiple of around 19-times earnings versus 16-times for the index, reflecting the fund’s overweight positioning to structural growth.

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. 27176

Important Information: This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. This communication is issued by Jupiter Investment Management Limited, The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom. Jupiter Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FRN: 171847).
The Jupiter UK Smaller Companies Fund and Jupiter UK Mid Cap Fund (“Funds”) are sub-funds of Jupiter Investment Management Series I, an investment company with variable capital incorporated in England and Wales and is authorised by the Financial Conduct Authority FRN: (467510). The Funds can be distributed to the public in the United Kingdom.
Jupiter uses all reasonable skill and care in compiling the information in this communication which is accurate only on the date of this communication. You should not rely upon the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. An investor should read the Key Investor Information Document(s) (“KIID”) before investing in the Fund. The KIID and the prospectus can be obtained from www.jupiteram.com in English and other required languages.

Jupiter UK Mid Cap Fund
Investment risk – there is no guarantee that the Fund will achieve its objective. A capital loss of some or all of the amount invested may occur.
Geographic concentration risk – a fall in the UK market may have a significant impact on the value of the Fund because it primarily invests in this market.
Company shares (i.e. equities) risk – the value of Company shares (i.e. equities) and similar investments may go down as well as up in response to the performance of individual companies and can be affected by daily stock market movements and general market conditions. Other influential factors include political, economic news, company earnings and significant corporate events.
Concentration risk (number of investments) – the Fund may at times hold a smaller number of investments, and therefore a fall in the value of a single investment may have a greater impact on the Fund’s value than if it held a larger number of investments.
Liquidity risk – some investments including those in unlisted companies may be hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.
Currency risk – the Fund can be exposed to different currencies. The value of your shares may rise and fall as a result of exchange rate movements.
Derivative risk – the Fund may use derivatives to reduce costs and/or the overall risk of the Fund (i.e. Efficient Portfolio Management (EPM)). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Fund. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.

For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.

Jupiter UK Smaller Companies Fund
Investment risk – there is no guarantee that the Fund will achieve its objective. A capital loss of some or all of the amount invested may occur.
Geographic concentration risk – a fall in the UK market may have a significant impact on the value of the Fund because it primarily invests in this market.
Company shares (i.e. equities) risk – the value of Company shares (i.e. equities) and similar investments may go down as well as up in response to the performance of individual companies and can be affected by daily stock market movements and general market conditions. Other influential factors include political, economic news, company earnings and significant corporate events.
Smaller companies risk – smaller companies are subject to greater risk and reward potential. Investments may be volatile or difficult to buy or sell.
Liquidity risk – some investments including those in unlisted companies may be hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.
Currency risk – the Fund can be exposed to different currencies. The value of your shares may rise and fall as a result of exchange rate movements.
Derivative risk – the Fund may use derivatives to reduce costs and/or the overall risk of the Fund (i.e. Efficient Portfolio Management (EPM)). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Fund. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.

For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.