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JPMAM’s Illsley on how stockpickers are benefitting in the UK market

JP Morgan portfolio manager James Illsley explains why the UK market is cheap and highlights the areas that are offering good value.

Rob Langston

By Rob Langston, News editor, FE Trustnet
Thursday April 20, 2017

Last year saw a rotation from quality growth stocks into value opportunities as markets began to anticipate stronger growth, which caught many active managers out.

Yet the £203.4m, three crown-rated fund JPM UK Equity Core fund performed strongly, returning 15.35 per cent in 2016 compared with a 16.75 per cent rise in the FTSE All Share index benchmark.

Indeed, the fund outperformed its peers, with the average IA UK All Companies sector fund delivering a 10.82 per cent gain over the year.

Performance of fund vs sector & benchmark in 2016


Source: FE Analytics

Portfolio manager James Illsley says the fund began adding to out-of-favour oil & gas stocks and miners a year ago, buying into a contrarian value trade.

They remain a significant part of the portfolio, with the largest holding Royal Dutch Shell representing 7.7 per cent of the fund; rival BP is also a top 10 holding.

It turned out to be a shrewd move as the FTSE All Share Oil & Gas index was up by 59.83 per cent over the year.

However, bottom-up stockpicking is an approach that can also deliver growth over the long term, says Illsley, a co-manager of the fund alongside John O’Brien and Christopher Llewelyn.

The fund aims to provide capital growth and outperform the FTSE All­ Share index over a longer timeframe through investment in a portfolio of UK companies.

“We really focus on stocks rather than making macro calls,” the portfolio manager noted.

Indeed, the fund aims to take much of its risk at a stock level, generating alpha from its overweight and underweight positions.

The rotation into value as well as last year’s referendum has seen a number of UK stocks fall out of favour over the past year, presenting an opportunity for stockpickers.

While the fund has no sector views, Illsley says the fund currently has a bias to financial and cyclical stocks that have become more attractively priced.

Indeed, financials is the largest sector representation within the fund, making up 24 per cent of the portfolio. While banking giants HSBC and Lloyds Banking Group are among the fund’s top 10 largest holdings, it also favours other parts of the market, such as insurers like Aviva. Illsley says valuations in the sector remain appealing, with some stocks trading at less than book value.

Since the UK referendum on EU membership last year, Illsley says the fund has also been picking up cheap housebuilding stocks, such as Redrow and Bellway.

The portfolio manager says valuations of housebuilders remain at cheap levels, comparatively, noting some of the challenges faced by the sector in recent years.

He said: “There have been supply problems in the housebuilding sector for 20 years and more.

“[The sector] should be building 250,000 homes per year, but it’s only building 190,000. Some are investment properties that aren’t being lived in.”

However, Illsley says housebuilders that suffered in the market downturn following the financial crisis of 2008 have responded well with extra support for the sector coming from the government.

“Management teams have learned the lessons of the past and haven’t over-levered... [they have] good financials in terms of earnings and balance sheets that are very secure,” he explained.

Concerns for the sector have been raised by the reflation environment, negative sentiment over the British economy and fall in sterling.

However, Illsley says this impact has allowed it to snap up some competitively priced stocks in the consumer goods sector, which makes up 15.8 per cent of the portfolio.

One example of a consumer stock, the fund holds and should continue to perform well in the face of more challenging market conditions is JD Sports.

“We have held JD Sports in the retail sector. It’s not cheap but has got a great business momentum, it continues to take market share and outperform stocks in the sector,” said Illsley.

Another area with greater sensitivity to consumer spending that the fund has built exposure to is travel & transport. Holdings include names such as National Express, International Hotels Group and cruise ship operator Carnival. However, the travel stocks in the portfolio also have significant exposure to international consumers and foreign revenues, says Illsley, despite being listed in London.

While more than two-thirds of the fund’s portfolio is invested in companies with a market capitalisation of £10bn or more, Illsely says there is no market cap bias.

Exposure to the smaller cap part of the market includes an investment in sister fund JPM UK Smaller Companies, overseen by Georgina Brittain and Katen Patel. Represented in the JPM UK Equity Core’s top 10 holdings, the fund makes up 3.5 per cent of the portfolio.

 “We don’t take a view on mid versus large cap, we take a view on the stocks,” said Illsley.

Smaller companies suffered in 2016, as investors switched into more internationally focused stocks with less exposure to the domestic market. But Illsely says that uncertainty in the market caused by Brexit over the economy has presented some opportunities.

“Volatility is good for stockpickers,” he said.  “We will find opportunities, for us it’s a very good market environment.”

He added: “The key thing is… we don’t think the market is expensive: it’s cheap relative to history.

“Revenue is coming from overseas and you get global exposure at cheap prices.

“Our portfolio takes more risk on the stock level and is limited at a macro level. We have outperformed over a long period and we’re confident that will continue”

Over three years the fund has 27.26 per cent return, compared with a 24.87 per cent rise in the benchmark FTSE All Share index and a 21.75 per cent gain for the average IA UK All Companies sector fund.

Performance of fund vs sector & benchmark over 3yrs


Source: FE Analytics

The fund has an ongoing charge figure (OCF) of 0.4 per cent, as of 1 January 2017.

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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