In our latest Insider Interview, Kyle Caldwell puts the questions to Georgina Brittain, fund manager of JPMorgan Mid Cap (LSE:JMF) Investment Trust and JPMorgan UK Smaller Companies (LSE:JMI) Investment Trust. Brittain, who has been investing in this area of the UK market for over 20 years, explains the three areas she focuses on to find the winners of the future.
Brittain also gives an overview of the similarities and differences between the two investment trusts she manages, names a stock that is one of the highest-conviction holdings in both portfolios, and explains the fact that the smaller company part of the market is under-researched is an advantage for investors who like to deep dive into companies.
Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today, I'm joined by Georgina Brittain, manager of the JPMorgan Mid Cap Investment Trust and the JPMorgan UK Smaller Companies Investment Trust. Georgina, great to have you today.
Georgina Brittain, manager of the JPMorgan Mid Cap Investment Trust and the JPMorgan UK Smaller Companies Investment Trust: Lovely to be here.
Kyle Caldwell: So, Georgina, to kick off, could you give us a run through of your investment process, explaining how you invest and the sorts of qualities and attributes that you like to see in a company?
Georgina Brittain: Absolutely. So, in one word, we're looking for all the winners, the winners today, but obviously the winners in the future. And we have an investment philosophy that sits behind everything we do. And what we're looking for is very straightforward. We're looking for attractively valued, high-quality companies, which have positive momentum.
So, if you drill down into that, there are three areas we focus on. So, value, which I'm sure we'll talk more about, quality and momentum. And all these for us are numerical. These are driven by numbers. So, if we start with value, we look at obviously various facets, but there’s two things we really focus on. One is the humble price-to-earnings (P/E), which we still find generally very useful. But the key focus for us is free cash flow. So, we want companies that are not only making profits obviously, but that are generating cash. And that's a very key metric for us. So that's our value factor that we focus on.
When we talk about quality, every fund manager you've ever interviewed will talk about the quality of management, etcetera. And we, of course, look at that. But really with talking about numbers, we're looking at balance sheets, we're looking at things such as return on equity, return on invested capital, because these prove that the company has the quality that we're looking for. And then third and perhaps foremost, we like to be exposed to all three in our portfolios, but probably the most important for us is momentum. And our key focus there is earnings momentum.
So, what we're looking for are companies that are doing better than analysts’ expectations and, ideally, they're doing better than the companies own expectations. So, this is something that we focus on every day, X number of company reports and results, and we're looking at how they're doing versus the market and their own expectations.
Why we focus on it so much is because it does tell you how the company is doing. But we drill down into it. So, why is it doing better than expected? And if it's because they've got money in the bank and they're earning more interest than we expected, well, that's great. And they've got more cash than we thought they had. But that's not driving real momentum. We want to know that the businesses are really trading well. That's a key focus for us.
Kyle Caldwell: And in terms of company size, is there an upper limit for the mid-cap companies held in the Mid Cap investment trust, and for the small company investment trust, is there a lower limit? I also wanted to ask you, do you invest in AIM stocks?
Georgina Brittain: Yes. So, three questions there. In terms of mid-cap, I mean, obviously our absolute focus is the FTSE 250, but we have a guideline that allows us to have 15% of the fund outside the index. And we generally use that 15%. A large part of that will be FTSE 100 names, a few, but they will be stocks that were in the FTSE 250. And when they went into the FTSE 100, we chose to keep holding them. We've got a couple of examples in the portfolio. Two key ones would be JD Sports Fashion (LSE:JD.) and Ashtead Group (LSE:AHT).
And then the other part of that 15% parameter that we're given, we will invest in AIM. So, we do have some AIM stocks. Obviously, they need to be of the right size to fit in with the remit. In terms of our smaller companies investment trust, we go pretty low because, of course, it is a closed-end vehicle. You're never going to have flows that mean you have to sell things you don't want to.
And we go down to $100 million market cap; that's our low point. So, then, as I said in the mid-cap, we will have a couple of AIM names. But for smaller companies our benchmark is the Numis smaller companies plus AIM. We have the ability and a large number of names within the index are on AIM. As we speak today, I believe we're close to 40% of the fund being on AIM. It is a deliberate choice. And, generally, for us, we're choosing them not because they're on AIM, we’re choosing the companies and we are fairly agnostic as to whether they main-list or AIM.
Kyle Caldwell: So, how much crossover is there between the two investment trusts? I noticed among the top 10 holdings they share four companies in common, and they are OSB Group (LSE:OSB), Bank of Georgia Group (LSE:BGEO), 4imprint Group (LSE:FOUR) and Jet2 (LSE:JET2). How much crossover is there?
Georgina Brittain: So, last time we officially measured this, which to be honest is a couple of months out of date, it was 40%, which compared to history is quite a high number. But the reason for that is because the FTSE 250 has fallen so far. You know, there is more overlap in terms of the indices than we're used to seeing in the past.
Kyle Caldwell: So, those four companies that are in both respective top 10s, are they your highest-conviction holdings?
Georgina Brittain: They are very much within our top 10 highest conviction within in each portfolio. Yes, they don't get there by accident. As a company shows and demonstrates that it's trading extremely well, we will tend to buy more and then, of course, hopefully you get the share price appreciation. We have for both funds the maximum size that we will hold for an individual name, we call it active, so obviously plus the benchmark, is 5%. So, it’s quite a punchy number.
Kyle Caldwell: And out of those four companies, is there one that you would particularly highlight at the moment?
Georgina Brittain: Jet2, which is an AIM company. I'm sure you know, it's the tour operator. We have known this company for a long time, as [is the case for] most of our investments. What I'm about to say, a key theme will come out here. So, Jet2 has been obviously hit by Covid-19. Naturally, the share price, as you can imagine, fell very significantly because none of us were allowed to go on holiday.
We bought a significant amount more. We didn't sell, we bought more because our view then - and absolutely proven - is that they had been gaining market share before and trading extremely strongly. We thought as soon as we were allowed to, we would all rush out and go on holiday, which [has] again very much proven to be the case. And it was very clear in our view, given what the management is doing, that they would be winning market share. And all that thesis is playing out. So, that is a very, as you heard, high-conviction holding and is very cheap. Again, that’s a theme I'm going to come back to quite frequently because the market is cheap.
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Kyle Caldwell: The UK smaller company market is under-researched. As a fund manager does that give you a big advantage?
Georgina Brittain: Absolutely, yes. And here I must do a shout-out. So, obviously I co-run both these funds with my colleague Katen Patel, but we also have Ed Hezlet, who works for us, and he is a fund manager, but for us he is an analyst, and he's a fabulous analyst and specialises in the deep dive. He'll go into Companies House and look at 10 years of records, etc. So, imagine what an advantage that is, where he does the deep dive on companies that are very badly followed. We see that absolutely as a competitive advantage.
Kyle Caldwell: Are there any examples of stocks that you could provide where there's very little analyst coverage?
Georgina Brittain: Absolutely. We don't own any companies where there is no coverage at all, because as you heard, we do care about analysts’ expectations in the market. And how are we to judge how well the company is doing apart from what they tell you without external coverage? So, we don't own any, we wouldn't own any that have no broker.
But we definitely own some with absolutely minimal. So again, one of our very large holdings in our smaller companies trust is Alpha Group International (LSE:ALPH), previously called Alpha FX. They changed the name recently and until literally about the last month that had one broker covering it. And that is in our top 10. So, you know, we're not afraid of that.
A second one would be a Warpaint London (LSE:W7L), the cosmetics company, again, one or two brokers covering it. As companies get larger and do well which, ideally, is why we own them, generally you do see more coverage coming in. So, we've had many examples of companies with, say, one broker and now they get to five, six, seven. And we will encourage that because by that point we've got a large position [and] now we want more people to get the story and start buying and send the price up further.
Kyle Caldwell: You've talked us through your investment process. But in terms of sectors or themes, is that something that you think about at all?
Georgina Brittain: In all honesty, we don't really think about sectors. Obviously, we check where we're at and we look, but sectors are a by-product of our stock picking, very much so. We're all about individual companies. And in terms of themes, I would say two things. So, I've been investing in this area of the market for many years. And one thing I learned a long time ago is given that our universe is finite and is not that big, you can't invest in a theme because you're always investing in the company.
So, there are amazing funds out there with healthcare funds or whatever it is, cybersecurity funds, etc, because they can choose, let's say they're global, from all around the world. And fantastic theme and great. But we could say, oh, we're really interested in cybersecurity, therefore we buy X, but if X itself isn't executing property - sorry, a lot of X's in that sentence! - the shares will go down. It doesn't matter that you’re right on the theme, it's always, always about the company and its delivery. So, that's a kind of generic comment about this.
But having said that, and I have touched on this a little bit already, what we're looking at now, life is hard out there. A lot of companies are performing extremely strongly. But we're all aware of the very many headwinds that corporates are facing. So, we're looking as I mentioned before, for the winners and you demonstrate winning by gaining market share. And clearly a lot of companies are finding it very difficult and falling by the wayside. So, we want to be in the ones that are, to put it one way, hoovering up the market share.
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Kyle Caldwell: I also wanted to ask you about the increased trend of companies staying private for longer. Does that make your job harder when there are fewer companies listing?
Georgina Brittain: It's a question that comes up a lot at the moment and, clearly, it's front of mind for a lot of people. But in our FTSE 250 there are always 250 companies, not unsurprisingly. And in our Numis plus AIM index, there are well over 1,000 companies. So, I know there are and, rightly, a lot of concerns about de-equitisation.
We are seeing a lot of takeovers going on in the mid and small-cap space. Almost invariably one a week, let's say sometimes five a week, one a day kind of thing. But we absolutely do not have a problem with opportunities. It is very broad and we always have new ideas that we're looking at and looking to invest into.
Kyle Caldwell: Georgina, thanks for your time today.
Georgina Brittain: Pleasure.
Kyle Caldwell: So, that's it for this episode. You can check out the rest of our Insider Interviews on our YouTube channel. Where you can like, comment, and subscribe. Hopefully I'll see you again.
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