While some equity funds seek returns by going further down the market cap scale, JOHCM UK Opportunities managers Rachel Reutter and Michael Ulrich prefer the UK large-cap space.
Their £318m fund indeed runs heavier weighting to bigger companies, with more than two-thirds invested into large-cap equities.
Reutter said: “We see fantastic opportunities in global leading businesses that sit in the FTSE 100. It's so unloved that it’s a very uncrowded market.
“We like the characteristics of some of these big global businesses: they’ve got the diversity of cash flows, big cash flows and a lot of levers they can pull in a crisis.”
The FTSE 100 was not spared during the March sell-off, nor was the fund, which was sitting on around 20 per cent cash before the crisis.
Performance of the fund v benchmark and sector year-to-date
Source: FE Analytics
Co-manager Ulrich said the reason the fund was running a high level of cash going into the year was because of high valuations in the sort of stocks it wanted to buy.
“There was a misallocation of capital and corporate debt, some of those stocks were too high, and there was a general level of sort of complacency,” he said. “We came into this year with a cautious approach and there were some real opportunities that unfolded in March.”
The managers revealed that in an eight-week period over March and April JOHCM UK Opportunities deployed 30 per cent of fresh new capital into the market across a variety of names, including FTSE 100 names Intertek and Smith & Nephew as well as FTSE 250 stock Homeserve.
Reutter said the Covid-19 crisis also gave them an opportunity to reassess what the long-term growth drivers of some of the fund’s holdings were.
“We had an incredibly well researched watchlist,” she said. “We asked ourselves: ‘Has the long-term growth tail of this businesses got worse or has it got better?’
“So we really reformulated the fund to really only own what we think have incredibly strong positions coming out of this crisis.”
Home emergency repairs and improvements business Homeserve is now the fund’s third largest holding, but Reutter said it had been “on our shopping list for years”.
“We really like the business, they have all the characteristics we like: a good degree of recurring revenues, a retention rate of about 85 per cent in its core book, it's got growth going into US markets and Japan, and it also has a fantastic online business,” she said.
“One of the things that we’ve come up against is the prominence of UK equity income funds and people clamouring for bigger dividends, more buybacks and all that has come at the expense of balance sheets.
“We like businesses like Homeserve that have a strong platform, have that capital discipline and prioritise investing in the business.”
Homeserve share price year-to-date
Source: Google Finance
The managers said they really encouraged the companies in their fund to avoid coming out of the crisis with more debt than when they went into it with.
Reutter said: “Coming out of this crisis with a balance sheet in a market leading position able to invest able to take out the competition, that's a fantastic place to be.
“This is why we are bullish on a lot of the UK large-cap names, because we think they've got that firepower that position to really monopolise in the next few years.
“It's not going to be a straight line recovery, so we need the most solid companies we can that can get us through the next few years which is going to be a bumpy ride.”
Ulrich added: “There seems to be less focus on some of the real market leaders. If you want to buy some of the best companies, size does matter on a global basis.
“You can have the capacity to choose where you allocate capital, you have that stability that comes with diversity, and you can afford to invest.”
He pointed to Intertek, the consumer products testing business, which has the world’s biggest office health and safety testing network: “Intertek is continuously investing in new products and it's able to do that because of the size and scale it has globally and the cashflow it generates from its really solid businesses.”
Reutter said a new big theme or structural growth driver that has emerged after the crisis has been the role of government.
“The government is controlling massive parts of our lives and we are trying to find companies that can help the government, because quite frankly our government can’t implement all of these policies themselves,” she said.
“They are going to need a company like Intertek to say they’ve passed all those health and safety tests. This is a good example of the type of business that will benefit from this testing and health and safety environment.”
She also pointed to the fund’s holdings in Ashtead Group and Ferguson, which fit into the same theme: “This links to the point that the government is trying to reignite economies through fiscal spend and we expect infrastructure projects in particular to come back.”
Performance of the fund vs sector and benchmark over 5yrs
Source: FE Analytics
JOHCM UK Opportunities has delivered a total return of 14.82 per cent over the last five years, putting it in the second quartile of the IA UK All Companies sector and ahead of its FTSE All Share benchmark.
It has an ongoing charges figure of 0.87 per cent, although it also levies a performance fee.