Tap into contrarian opportunities via Jupiter UK Special Situations

“This shows how anxieties around the Brexit process have taken a very heavy toll on sentiment, but a lot of negativity is now priced into UK shares, which overall look compellingly cheap compared with other developed markets, as well as offering attractive yields,” says Jason Hollands, managing director at Tilney Investment Management Services. “The UK market is very international in nature with over 70 per cent of FTSE 100 company earnings derived outside the UK, and it should not be considered as a yardstick for the UK economy. There are opportunities in UK equities for contrarian investors, and a successfully concluded deal between the UK and EU could see the market rerate materially.”

A good way to get access to these contrarian opportunities is a fund with a value investing style such as Jupiter UK Special Situations (GB00B4KL9F89). It has been run by highly experienced value investor Ben Whitmore since November 2006, before which he ran a value orientated fund at Schroders.

He recently said: “The most lowly valued companies on the UK market have generally performed the worst. While this has been a headwind for the performance of the fund, we are optimistic about future returns as the portfolio is lowly valued on our preferred measure, the Graham & Dodd price/earnings ratio, which uses historic 10-year average earnings as the basis for the calculation and gives a more robust view of valuation in the context of a business cycle.”

Jupiter UK Special Situations has a good performance record and is ahead of the FTSE All-Share index and Investment Association (IA) UK All Companies sector average over one, three, five and 10 years. 

Mr Whitmore and his team invest in companies whose share prices they think are undervalued. They assess the strength of a business's market position in comparison to its competitors, and consider any recent or potential changes in its industry and its ability to turn profits into cash – especially dividends.

They also look for quality characteristics such as a high return on operating assets, a strong balance sheet, which should enable the company to cope with unfavourable conditions, and profitability that closely mirrors cash flow over time. They look for opportunities across the market, but larger companies account for most of the fund’s assets – around 70 per cent at the end of September 2018.

“Solid stockpicking, controlling for factor exposures and opportunistic use of cash, have all added considerable value over time,” say analysts at Tilney Group.

Value investing relies on companies coming back into favour as their situation improves. But if this doesn’t happen, and their share prices don’t rise, the returns of the funds that invest in them will suffer. Even if the shares do recover it can take some time, so value funds can go through periods of underperformance.  

Jupiter UK Special Situations is fairly concentrated, with only 35 holdings, and if any one of these doesn’t do well it will have a greater effect on its overall return, increasing its risk.

However, analysts at Tilney Group say: “Value investing is typically associated with significant levels of volatility and considerable drawdowns, but Mr Whitmore has defied this stereotype. His fund has consistently achieved levels of volatility significantly lower than the broader market and other UK value managers, and has also offered some protection in stressed markets.”

For example, the fund benefited on a relative basis during August from being underweight companies exposed to emerging markets, such as miners.

So if you have a long-term investment horizon and want to exploit the contrarian bargains that UK equities may offer, Jupiter UK Special Situations' successful record suggests it is a good way to do it. Buy. LW

Jupiter UK Special Situations (GB00B4KL9F89)

Source: Morningstar, *Jupiter

Performance

Source: FE Analytics as at 31 October 2018

Top 10 holdings as at 30 September 2018 (%)

Source: Jupiter

Sector breakdown as at 30 September 2018 (%)

Source: Jupiter