Alex Savvides on staying focused on company transformations, monitoring macro themes and keeping an eye on potential opportunities
Our value equities investment strategy aims to generate returns backing business transformation within underperforming companies — supporting management as they execute self-help plans and move to recovery. We don’t try to predict the macro environment, as that’s not where we have an edge.
In fact, we aim to make returns that are highly idiosyncratic, based on stock selection and company- specific attributes, which often are less impacted by broader market conditions.
Nevertheless, there are a number of macro themes we are monitoring. These include regulatory matters such as the Financial Conduct Authority review of insurance industry pricing and premium finance; implications of the UK budget plan, which increased costs for businesses in the form of a higher National Insurance tax and higher minimum wage; and the broader impact of China’s economic challenges and the potential policy initiatives of the Trump administration in the U.S.
Balance and diversify
Whilst not taking a particular view on any of these macro themes, we have sought to balance and diversify risks in our holdings. For example, we think it makes sense to reduce pure automotive exposure such as vehicle manufacturers whilst selectively adding to business transformation stories that might have exposures to the automotive sector but where the company’s future will not be defined by their success or failure in that sector.
Another observation we would make is that the level of valuation dispersion in the market remains high, and as a result there are compelling potential opportunities on offer. This is an ideal environment for investors like us.
We’re highly selective, however. We seek companies that we believe are undervalued with a history of generating cash and higher financial returns and with hidden quality characteristics. We like companies with unique assets and pricing power. We focus on balance sheet risk and try to avoid distressed companies or declining industries.
Constructive engagement
Our investment approach is what we call constructive engagement. It’s a private equity-like mentality that if we own the shares in a company, we act like owners. We engage with management and boards and analyse and think deeply about the companies we invest in. We believe this can give us a competitive edge and helps us take advantage of inefficient markets that can misprice assets at certain points in their lifecycle.
We also are highly patient investors, willing to look through short-term uncertainties to focus on the longer-term potential for improved growth and returns. We recognise that successful company turnarounds take time. We are willing to hold some businesses through the recovery and into the phase where growth moves faster.
Watch list
The current valuation opportunity in the market means we have a number of companies on our watch list, although we are highly disciplined and follow a strict process about businesses investments.
Whilst we are in a fairly unpredictable market environment, and this uncertainty may well continue in the short term, we believe that our business transformation investment approach provides predictability, as management teams can control and carry out their recovery plans. As such, we keep a laser-like focus on our investments and leave the macro predictions to others.
Jupiter UK dynamic equity strategy risks, please note:
- Pricing Risk – Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Market Concentration Risk (Geographical Region/Country) – Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
- Derivative risk – the strategy may use derivatives to reduce costs and/or the overall risk of the strategy (this is also known as Efficient Portfolio Management or “EPM”). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the strategy.
- Liquidity Risk (general) – During difficult market conditions there may not be enough investors to buy and sell certain investments. This may have an impact on the value of the strategy.
- Counterparty Risk – the risk of losses due to the default of a counterparty e.g. on a derivatives contract or a custodian that is safeguarding the strategy’s assets.
- Smaller Companies – The strategy invests in smaller companies, which can be less liquid than investments in larger companies and can have fewer resources than larger companies to cope with unexpected adverse events. In less favourable market conditions these companies may therefore under- perform larger companies and the strategy may under-perform strategies that invest predominantly in larger companies.
