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We are finding value everywhere: here are our newest holdings

Georgina Brittain, fund manager of JPMorgan Mid Cap Investment Trust and JPMorgan UK Smaller Companies Investment Trust, is finding plenty of low-valuation opportunities in the out-of-favour UK market.

20th October 2023 09:18

by Kyle Caldwell from interactive investor

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Georgina Brittain, fund manager of JPMorgan Mid Cap (LSE:JMF) Investment Trust and JPMorgan UK Smaller Companies (LSE:JMI) Investment Trust, is finding plenty of low-valuation opportunities in the out-of-favour UK market. In particular, the area she invests in has been out in the cold over the past two years due to interest rate rises, high inflation, and recession concerns.

In this interview with interactive investor’s Kyle Caldwell, she explains when mid- and small-cap stocks may enjoy time in the sun again, and runs through a handful of new holdings that were acquired to take advantage of attractive valuations.

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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, UK equities have been out of favour for quite a long time now and we've seen over the past two years the mid-cap and small cap part of the market particularly hurt by the increases in interest rates that have been taking place. So, what needs to happen for things to get better? What needs to change?

Georgina Brittain: This is the multibillion-dollar question that we're all asking, and we are obviously being asked it a lot. I would say two things on this. First, as you say, mid and small, in particular. I mean, the whole UK market's been out of favour, but in particular, mid and small-caps. Our view is, and proven by past data, that this area of the market is seen as a barometer of the UK economy. So, people have been extremely worried obviously that we were going into recession, our inflation was absolutely out of control and higher than elsewhere in the developed world, and, de facto, that's reflected in what happens to mid and small-caps. They just rampantly fall out of favour.

It is our belief and hope, and again, history suggests this will be the case, that when interest rates peak, obviously the corollary of that is that inflation really does look like it's in hand, [it’s] still falling and coming under control, then this will be our time in the sun again.

Kyle Caldwell: And in terms of valuations, the entire UK market is undervalued compared to its own history. Are there any areas or sectors of the market that you would pick out that are trading on unjustly cheap valuations?

Georgina Brittain: Well, first and foremost, as you said, the entire UK market is very cheap and definitely that is true of mids and smalls as well. Mid-cap, I can give you specifics. So, the price-to-earnings (P/E) on the market, the FTSE 250, is circa 11 times. Normal, by which I mean the last 20-plus years, is 14 times. So, a very significant discount and smaller companies will not be very different.

We're not focused on sectors. We are very much bottom-up stock pickers. And I don't mean to be unhelpful, but we are finding ideas everywhere, each day. And it really is almost a question for us because we are very fully invested. So, you really need to be feeling very strong conviction about new buys to sell something from the portfolio.

Kyle Caldwell: And could you talk us through some recent portfolio activity in terms of new holdings that have been introduced to both investment trusts since the start of this year?

Georgina Brittain: Absolutely. If I start with the Mid-Cap [trust], some new things that we put in, in the last year or so, [include] Mitchells & Butlers (LSE:MAB). It was very clear that following Covid-19 people were going to want to go and eat. People were going to go and spend their money, spend time with friends in a nice pub or bar. We hadn't held the company because it's very clear that there were massive headwinds for companies like this in terms of inflation, of all their costs, from their electricity to their staff to their food to their alcohol. So, we waited until that calmed down, and we believed that would peak before we bought in. So, Mitchells and Butler would be one.

Inchcape (LSE:INCH), the car distributor, would be another one. We really like the global deal, the huge deal, they did, I think it was at the back end of 2022, and we think it's incredibly undervalued given the strength of the franchise. So, that's just two examples of new additions to the portfolio.

And then absolutely we've added to various names. Some may surprise you. So, we've very much added to our housebuilders, which seems quite counterintuitive given what's going on, but our job is not to invest given the background of what's happening today, on the macro-economic background. It's to look at where we think things are going over the next 18 to 24 months and get in early, especially something like housebuilders, where you've got the assets, you understand that pricing is coming down. Life is difficult, let's put it mildly, for the housebuilders. But we know that there's a significant shortage of housing in this country, and we know that margins will come back and prices at some point will come back.

In terms of the Smaller Companies investment trust, again, of course, we've been adding to certain names and we do that just to take advantage of stock price volatility if we really like a name and the shares have fallen for no reason, you'll tend to see us adding to positions. But in terms of new names, again, there have been a few this year, and a couple of them I mentioned. One is Card Factory (LSE:CARD). The clue is in the name, they’re the card retailer. And, again, a theme I mentioned before very clearly, [was that] some of the other card retailers are struggling and publicly struggling was Card Factory. It had been in a very difficult position, and new management came in. There’s been a very significant turnaround and they are winning market share.

We also bought back into a position in XPS Pensions Group (LSE:XPS), which offers pension consulting and administration and their market is booming. So, we're pretty excited about that one as well.

And the third one I'll mention is a more recent purchase, a few months ago, which is a small position in a small company called hVIVO (LSE:HVO). And this does, I need to get the phrasing right on this, human trial testing for new vaccines. We think it's a very small market at the moment and it is quite new. Obviously human trials are going to be, it's new, small and very highly regulated. It's actually the global leader, this very small company. But we think this is a market that's really set to expand. So, we're watching and waiting and we've got a small position at this stage.

Kyle Caldwell: And, of course, as well as the UK market being cheap, the two investment trusts that you manage, they're trading on discounts of over 10%. So that offers an avenue for private investors to buy the UK even cheaper.

Georgina Brittain: Absolutely. I find it hard to put into words how cheap a lot of the opportunities are, a lot of the stocks we own are, and then add on the type of discounts that both our investment trusts are on, so you're getting incredibly undervalued assets in our view, on an even greater discount. There's a lot to be said for that.

Kyle Caldwell: And in terms of the UK's weighting in the MSCI World Index, we've seen the UK's weighting decline quite notably over the years and it now only accounts for 4% of that index. So, how would you make the case for UK equities at the moment?

Georgina Brittain: Great question. So, I think I'd make a couple of points on this. First and foremost, I come back to valuations. We all know buy low, sell high is the way we make money. The way we [make] money, is the way investors make money. And you know, we're very low. I can't pretend, I can say we're at the bottom, clearly, but we are very cheap, which is always a good starting point.

Also, I believe part of the reason the UK market is so cheap is exactly to your point that, over the years, especially a lot of the larger discretionary wealth managers, and indeed the insurance companies, have been reducing their exposure to the UK very significantly. So, that's been a massive headwind to the UK stock market. At 4% it's hard to believe it goes much lower, especially because that's the index right now.

If you lay on cheap valuations, and what we hope is an end of selling, when people turn around and start going, oh, this is really cheap and the UK is not the basket case people were calling it this time last year, and actually the economy is not in this terrible state that, again, a lot of people were absolutely sure it was. When people start buying, they're going to find it hard to buy and things go up.

Kyle Caldwell: And, finally, a question we ask all fund managers: do you have skin in the game?

Georgina Brittain: Yes, indeed.

Kyle Caldwell: Georgina, thanks for your time today.

Georgina Brittain: Pleasure.

Kyle Caldwell: 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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