Taking a disciplined, high conviction approach aimed at investing in undervalued, cash-generative companies with strong balance sheets and reliable dividends.
The UK market is undervalued versus history and versus other markets, and returns have trailed those of the more technology-heavy US market since the Covid pandemic. However, there are signs that this may be starting to change. The FTSE 100 and FTSE All Share indices have notched record highs this year. Global investors remain underweight to the UK, but we believe that there are a confluence of macroeconomic factors beginning to take effect which provides an appealing backdrop for UK equity income investors. Given the historical levels at which the UK market is undervalued, we believe that this provides a rare opportunity to invest in quality companies at discount prices.
Supportive macro backdrop and corporate activity
After sustained headwinds, the macroeconomic environment for the UK is encouraging, driven by depressed valuations, strong corporate activity, and the potential for easing monetary policy. There has been an 84% increase in M&A activity involving a UK target compared to 2023. There has also been a dramatic increase in share buybacks by UK companies – we expect to see around £50 billion in buybacks this year, and a total of £150 billion over three years. The trend in share buybacks comes as UK pension funds wind down their sale of UK equities. Pension funds cut their holdings from £590 billion in 1997 to £120 billion currently, to diversify their portfolios. We see a potential inflection point for the market from these selling and buyback trends.
Fund specific risks
- Interest Rate Risk – The Fund can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates, e.g. the value of a bond tends to decrease when interest rates rise
- 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 Fund may use derivatives to reduce costs and/or the overall risk of the Fund (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 Fund.
- Counterparty Default Risk – The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the Fund’s assets.
- Smaller Companies – The Fund 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 Fund may under-perform funds that invest predominantly in larger companies.
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Important Information
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. Past performance is not a guide to future performance. Company/Holding/Stock examples are for illustrative purposes only and are not a recommendation to buy or sell. Quoted yields are not a guide or guarantee for the expected level of distributions to be received. The yield may fluctuate significantly during times of extreme market and economic volatility. Awards and Ratings should not be taken as a recommendation. Every effort is made to ensure the accuracy of the information provided but no assurance or warranties are given. This communication 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. An investor should read the Key Investor Information Document (KIID) before investing in the Fund. The KIID and the Prospectus are available for download from www.jupiteram.com.