Our value equities1 investment strategy aims to generate returns backing business transformation within underperforming companies – in this way we support management as they undertake recovery plans to help their companies.
We don’t try to predict the macroeconomic environment, as that’s not where we have an edge.
In fact, we aim to make returns that are highly idiosyncratic, by this we mean returns that are more reliant on the stocks we buy and company-specific attributes, and less impacted by broader market conditions.
Nevertheless, there are a number of macro-economic 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 government budget plan, which increased costs for businesses in the form of a higher National Insurance tax and higher minimum wage. We also are monitoring 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 or avoid automotive industry exposure such as vehicle manufacturers whilst selectively adding to business transformation opportunities that might have exposure 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 dispersion2 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, We also look for hidden quality characteristics; we like companies with unique assets and pricing power, ie the ability to raise prices without reducing demand. 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 means if we own the shares in a company, we act like owners. We talk to and 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 inefficiency in markets that can lead to companies and assets being mispriced and undervalued.
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.
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 business 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 macroeconomic predictions to others.
1Value investors seek to buy stocks that are underpriced or trading for less than their intrinsic or book value
2Valuation dispersion refers to the difference in value between more expensive and less expensive parts of the market. High dispersion means that this valuation gap is wider, low dispersion means the valuation gap is narrower
Strategy risks
- 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.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This is a marketing document. This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. 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 authors 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. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.