UK equity funds have hardly been flavour of the month as of late. According to data from
Calastone, investors pulled £962m ($1.14bn) from UK-focused equity funds in February, the third largest monthly outflow on record and the 21st consecutive month of net outflows.
The UK has been hit by a double whammy of political and economic crises in the past year with two Prime Ministers resigning, inflation hitting a 40-year high and a period of turbulence ensuing following former Prime Minister Liz Truss’ disastrous mini-budget.
In addition, while there is talk of a soft landing or even no landing in the US right now, the UK is expected to experience the biggest contraction among the G7 economies, according to Bank of England forecasts.
Yet, paradoxically, now might be a good time to take a closer look at UK equities. The FTSE 100 was one of the few major indices globally last year to rise as it eked out a 1% increase, largely due to the preponderance of commodity stocks in the index.
In contrast, the more domestic-focused FTSE 250 index was down 20% last year.
The FTSE 100 even hit a record high last month, buoyed not only by the energy boom but increasing belief that the Federal Reserve would soon bring to a close its interest rate hiking cycle.
Against this backdrop, Darius McDermott, managing director at Chelsea Financial Services & FundCalibre, chose the Jupiter UK Alpha and Fidelity UK Special Situations funds for comparison for this week’s head-to-head.
| Fidelity | Jupiter | |
| Size | $194m | $50.2m |
| Inception | 2021 | 2014 |
| Managers | Alex Wright, Jonathan Winton | Richard Buxton |
| One-year cumulative return | 0.12% | 0.11% |
| One-year annualised alpha | 0.12 | 0.11 |
| One-year annualised volatility | 3.05 | 3.32 |
| One-year information ratio | 0.88 | 0.76 |
| Morningstar star rating | n/a | n/a |
| Morningstar analyst rating | n/a | n/a |
| FE Crown fund rating | *** | *** |
| OCF (retail share class) | 1.94% | 1.84% |
Investment approach
The Jupiter UK Alpha fund is a high conviction portfolio of 35 to 40, mostly large, UK companies that fund manager, Richard Buxton, believes have strong business models, healthy balance sheets and, as yet, unrecognised potential.
It invests solely in the UK and predominately in larger companies. 75%-80% of the fund is invested in the FTSE 100, with the remaining 20%-25% invested in the FTSE 250. McDermott notes that Buxton is pragmatic and will own a mixture of growth and value stocks. The fund has a low turnover with an initial 3-5 year investment horizon.
“The process is about understanding what are the key drivers of returns for individual companies. Richard and his team are particularly interested in change within companies or industries, which might present opportunities. There is also a focus on the quality of management and the governance structures which are in place to protect shareholders,” said McDermott.
The portfolio is also generally diversified across a number of sectors and single stock risk is carefully managed with position sizes generally no greater than 5%.
“Richard and his team are particularly interested in change within companies or industries, which might present opportunities.”
Darius McDermott, Managing Director, Chelsea Financial Services & FundCalibre
In contrast, the Fidelity fund has a clear value bias as well as an unconstrained approach, which means that it can have significant off-benchmark and overseas investments. As its name implies, the fund favours companies that have gone through a sustained period of underperformance but their potential for recovery has been overlooked.
“Given its deep value style, the fund has been out of fashion for a number of years, particularly during the Covid sell-off in 2020. However, this has turned around in the past couple of years,” said McDermott.
The fund also has more exposure to small and mid-caps. The final portfolio typically has between 80 and 120 investments, while it also has the flexibility to invest in derivatives.
Fund characteristics
Sector allocation:
| Fidelity | Jupiter | ||
| Financials | 33% | Consumer Discretionary | 22.7% |
| Industrials | 19.4% | Financials | 17.5% |
| Consumer Discretionary | 11.1% | Industrials | 12.2% |
| Healthcare | 10.7% | Materials | 12% |
| Consumer Staples | 9% | Healthcare | 10.3% |
| Energy | 8.6% | Energy | 8% |
| Basic Materials | 4.4% | Utilities | 6.5% |
| Telecommunications | 3% | Consumer Staples | 5.1% |
| Technology | 1.5% | IT | 4.7% |
| Utilities | 0.6% | Cash | 0.9% |
Country allocation:
| Fidelity | Weighting | Jupiter | Weighting |
| UK | 73.4% | n/a | n/a |
| Ireland | 8.4% | n/a | n/a |
| France | 3.4% | n/a | n/a |
| Switzerland | 2.9% | n/a | n/a |
| Austria | 2.7% | n/a | n/a |
| Greece | 1.7% | n/a | n/a |
| Bermuda | 1.7% | n/a | n/a |
| Bailiwick of Jersey | 1.5% | ||
| Sweden | 1.3% | ||
| US | 1.2% | ||
| Others | 3.1% |
Top 5 holdings:
| Fidelity | Weighting | Jupiter | Weighting |
| NatWest | 3.9% | AstraZeneca | 5.6% |
| AIB Group | 3.8% | Glencore | 5.3% |
| Imperial Brands | 3.8% | Lloyds Banking Group | 5.1% |
| Serco Group | 3.7% | Barclays | 4.8% |
| Phoenix Group Holdings | 3.7% | Drax Group | 4.8% |
Performance
The Jupiter fund has historically been more volatile than many of its peers, although Buxton has managed to deliver outperformance with the strategy for a number of years. McDermott notes that the fund has the same approach as the Schroder UK Alpha Plus fund, which he previously ran.
“We would generally consider Richard to be a ‘risk on’ manager. He has generally delivered his best performance in a rising market, but the fund has historically struggled during a recession or a wider market fall,” said McDermott.
With regards to the Fidelity fund, McDermott notes that its contrarian nature means it is difficult to decipher when the fund will perform best.
“As with the Jupiter fund, you’d expect this portfolio to do well when value is the strongest investment style in markets. However, the greater focus on mid and small caps also means this fund’s fortunes’ are slightly intertwined towards the fortunes of these areas of the market,” said McDermott.
McDermott also noted that despite the FTSE 100 recently hitting an all-time high, the UK market still looks cheap, which should create the right environment for active managers who look for undervalued companies like the Fidelity fund.
Discrete calendar year performance
| Fund/Sector | YTD* | 2022 | 2021 | 2020 | 2019 |
| Fidelity | 5.26% | -1.40% | n/a | n/a | n/a |
| Jupiter | 8.11% | -1.71% | 15.47% | -8.43% | 22.87% |
Manager review
McDermott notes that both funds have market-leading investment teams in the UK.
“Richard Buxton is one of the most experienced and highly regarded investors in the industry and has delivered outperformance with this investment strategy for many years. He is ably supported by what we consider to be one of the strongest UK equity investment teams in fund management,” he said.
Buxton began his career in 1985 and has worked at Barings, Schroders and Old Mutual Global Investors.
Meanwhile, Alex Wright and Jonathan Winton run the Fidelity fund. Wright has over 20 years’ investment experience across UK and European equity markets at Fidelity, while Winton joined the asset manager as an analyst and has worked alongside Wright in the UK equities team since 2013.
Conclusion
McDermott notes that the Jupiter fund should be considered a core holding with a slight value overlay, while the Fidelity fund is more of a pure value play.
“If you are a patient investor – I’d lean slightly towards the Fidelity fund in the current climate, purely because UK mid and small-caps have been hit so hard when compared to the FTSE 100 – which has been fairly resilient in 2022. I also believe that any readjustment in the valuation gap between UK PLC and its peers overseas should create a sweet spot for UK Special Situations given its contrarian nature – just don’t ask me when that will happen!” he said.
