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Bet on value turnaround with JPM UK Dynamic

If value stocks start to do better JPM UK Dynamic should reap the benefits
March 3, 2016

Investing in areas of the market that are out of favour can reap good returns over time - and value stocks, which fall into real economy segments such as energy, mining, banks and industrials - currently fit into this category.

IC TIP: Buy at 159p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Targets value stocks, which could do well
  • Good record over recent years
  • Can invest in smaller companies
Bear points
  • Poor performance longer term
  • Volatility

Peter Toogood, investment director at research company City Financial, believes that a rotation from growth to value could occur in one of two ways. "The first is a complete market washout, reminiscent of 2008, when all sectors of the market fell in tandem but value stocks outperformed – they were cheaper and no one owned them," he says. "The second is that global economic doomsayers are wrong and economic growth revives in the second half of the year.

"We stand by the assertion that for those who are inclined to invest long-term money, value managers are the way to go. The price action in recent months highlights the fact that value is slowly winning the battle."

If you are persuaded by this argument too, funds with a value focus include JPM UK Dynamic (GB00B6X9BB33).

"This has a process that incorporates value criteria through its objective screen-based, behavioural approach, and it has been increasing the value component in its portfolio recently," says Mr Toogood.

JPM UK Dynamic's managers - John Baker, Jonathan Ingram and Blake Crawford - invest on the premise that investors are often overconfident, causing them to be either overly optimistic or pessimistic on a stock's future. This causes share prices to over or undervalue the underlying company. They aim to exploit this by targeting fundamentally sound companies which they feel other investors have unduly undervalued. They specifically target profitable businesses with sustainable earnings and management teams that are disciplined with their capital expenditure. They believe managements that seek to grow a firm beyond its optimum size often lose focus on shareholder returns.

JPM UK Dynamic includes resources stocks such as Royal Dutch Shell (RDSB), BP (BP.) and Rio Tinto (RIO) in its top 10 holdings. Oil and gas, basic materials and industrials account for 15.2 per cent of assets.

Because of the fund's small size - £164.3m - it can also take meaningful positions in small and medium-sized companies, widening the options available to its managers.

JPMorgan says that this fund could suit investors looking for a higher risk/return strategy as part of a diversified portfolio, or investors looking to enhance long-term returns. JPMorgan advises holding it for at least five years.

JPM UK Dynamic performed poorly between 2007 and 2012 due to poor stock selection, according to Heather Ferguson, investment analyst at Hargreaves Lansdown. However, since then the fund has performed much better, and over one, three, and five years beats its benchmark the FTSE All Share, and the Investment Association UK All Companies sector average. The investment team was strengthened with the addition of Mr Crawford in 2013.

Because JPM UK Dynamic can invest in higher risk smaller and medium sized companies, and moves aggressively between stocks and sectors, it tends to be more volatile than the average UK All Companies fund, according to Ms Ferguson.

And value-focused funds which take this approach will differ from the market and might have periods of underperformance.

However, if you have a long-term investment horizon and high risk appetite, and wish to allocate a small portion of your portfolio toareas that could enjoy a strong turnaround, then JPMorgan Dynamic could be a good bet. Buy.

 

JPMORGAN UK DYNAMIC (GB00B6X9BB33)

PRICE159pSHARPE RATIO0.91
IA SECTORUK All CompaniesSTANDARD DEVIATION11.08%
FUND TYPE Open-ended investment companyMEAN RETURN11.09%
FUND SIZE£164.3mYIELD2.50%
SET UP DATE01/10/2000*ONGOING CHARGE0.93%
MANAGERS START DATE31-Mar-07/12-Aug-13MORE DETAILSam.jpmorgan.com

Source: Morningstar, JPMorgan

 

Performance

 1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)10-year cumulative total return (%) 
JPM UK Dynamic C Acc-1.432.154.684.1
FTSE All Share TR GBP-7.412.428.259.4
IA UK All Companies sector average-5.418.636.260.8

Source: Morningstar as at 26 February 2016

 

Top 10 holdings as at 31 January 2016 (%)

Royal Dutch Shell4.7
BT4
British American Tobacco3.6
Imperial Tobacco3.6
Reckitt Benckiser3.2
BP3.2
ITV3.00
Unilever2.90
Prudential2.70
Rio Tinto2.5

 

Sector breakdown (%)

Consumer goods26.8
Consumer services26.7
Financials 16.2
Oil & gas8.9
Telecommunications 4
Basic materials 3.3
Industrials3
Technology 1.5
Healthcare 0.4
Cash 9.2