Looking beyond the largest and most popular stocks in a sector can be a good strategy for long-term investors, JP Morgan Asset Management’s Jonathan Ingram argues, as it offers exposure to opportunities that others might have missed. 
Even though there are 642 companies included in the FTSE All Share – and others operating in markets such as the AIM or in the unquoted space – it seems that a handful of companies are owned by a large number of fund managers.
If we look at the IA UK All Companies sector, FE Analytics shows that Royal Dutch Shell is found in the top 10 holdings of more one in five of the peer group – and will be held by many more lower down their portfolios. Furthermore, BP is a major holding in 20 per cent of funds, GlaxoSmithKline in 17 per cent and AstraZeneca in 14.5 per cent.
Ingram, who co-manages the JPM UK Dynamic fund with John Baker and Blake Crawford, points out that attractive companies can be found outside of the more obvious names. In a recent article we recently explored the process behind the fund and here Ingram chooses three holdings that demonstrate its differentiated portfolio.
Fever-Tree
Picking a small-cap holding, Ingram highlights the JPM UK Dynamic fund’s 1.5 per cent position in Fever-Tree, which has a market cap of around £700m and specialises in premium tonics made with natural ingredients.
“This is a stock that encapsulates a lot of what we’re trying to do on the fund: it’s not a huge company and is of a size that means the larger funds are unable to get to it without virtually taking over the company,” Ingram said.
“This is a fantastic UK-based growth story and has already expanded outside of the UK, so it's not one of those small companies that is just exposed to the domestic economy. Fever-Tree found its own growth niche: consumers spent all their time and money on the gin without thinking about the tonic, but it has made them pay more attention to what makes up 70 or 80 per cent of the actual drink. It's a phenomenal success story.”
JPM UK Dynamic has held the stock since its initial public offering (IPO) in November 2014 and, as the below graph shows, Fever-Tree made a total return of around 300 per cent between then and the end of March 2016.
Performance of stock vs index between IPO and the end of March 2016
Source: FE Analytics. Total return with income reinvested and in sterling, between 7 November 2014 and 31 March 2016
Ingram says Fever-Tree is a good example of how the fund’s investment process – which focuses on analysing the value, quality and momentum factors driving a stock – has allowed it to buy and hold a strong performer.
“From our investment process point of view, it's got one of the highest quality management teams we analyse, they run the company in a very conservative way – not conservative as in boring or no growth – and we've had a lot of good news out of them as a result. It has materially exceeded forecasts on a very consistent basis and it's a growth story we see no sign of ending,” he explained.
“Fever-Tree is a good example of a stock where we've not said: 'We've doubled our money, let's get out' but have held on to make even greater returns.”
Cairn Homes
JPM UK Dynamic has a “key overweight” to UK property – with holdings including the likes of Taylor Wimpey – and also has a stake in this Irish housebuilder, which has two completed developments in its portfolio and another nine that are upcoming.
Ingram says the firm is an attractive play on the Irish property market, which is “strong and improving” after the global financial crisis. The stock only listed on the London Stock Exchange in June last year, but made close to 20 per cent between then and the end of 2016’s first quarter.
Performance of stock between IPO and the end of March 2016
Source: FE Analytics. Total return with income reinvested and in sterling, between 11 June 2015 and 31 March 2016
“Cairn Homes was the first firm to get enough capital together and invest when Irish property was at quite knock-down prices, much like the UK housebuilders did in 2009 and 2010,” he said. “Cairn Homes has been able to raise substantial amounts of money and get development land in Ireland that should give them very healthy returns as they develop that and sell it on.”
However, the manager also argues that the company could perform well if the UK’s in-out referendum on the Europe Union came out in favour of the country leaving the union. This would be in contrast to the UK-based housebuilders, which would be expected to perform poorly if this were to occur.
“In a Brexit scenario, we think some of the most likely beneficiaries in the real estate space would be Irish companies. If you look at US firms who have their base in the UK to access Europe, in a Brexit scenario you expect the language factor to dictate that Ireland is in pole position to take a lot of that office space demand and, by extension, staff living space,” he said.
“Cairn Homes has a lot of development land in and around Dublin. Because of this we think Cairn Homes would perform well in a Brexit and offer some offset to the UK housebuilders that might suffer. This Brexit factor is just an added benefit though, as the company looks very good on the other factors in our process.”
Rio Tinto
Ingram notes that mining companies have been out of favour since 2011, when commodity prices started to slow, but says JPM UK Dynamic’s management team has confidence in FTSE 100 mining giant Rio Tinto and has been adding to it recently.
The below graph shows how Rio Tinto has lagged the FTSE 100 over the five years to the end of March but, at the same time, has outperformed its average peer in the FTSE All Share Mining index.
Performance of stock vs indices over 5yrs to end of March 2016
Source: FE Analytics. Total return with income reinvested and in sterling, over the five year to 31 March 2016
“Among the mining stocks, Rio Tinto seems to be the highest quality company out there and we see it as the cheapest as well, when you consider the assets it has. Rio Tinto is very exposed to iron ore and a lot of investment went into the production of iron ore, which with hindsight meant the sector had overshot considering how much demand was out there and we've ended up with oversupply,” he said.
“But we certainly think prices are more normalised now as the supply/demand imbalances have been lessened and what we're left with now is one of the world's leading producers of iron ore, which is something the world is never going to stop needing.”