In the final edition of this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from Georgina Brittaian, manager of the JPMorgan UK Small Cap Growth & Income
How does your fund stand out from others in the same market?
What really sets us apart is our focus on momentum, especially earnings momentum – we are always on the hunt for companies that exceed both market expectations and their own forecasts.
There is a lot of market noise and a lot of superficial metrics out there, but we are guided by thorough analysis of earnings reports. This is crucial.
It helps us understand the reasons behind a company’s superior performance and helps minimise emotional biases in our investment decisions. Ultimately, it’s all about prioritising genuine business activity to ensure our portfolio aligns with companies that are trading well.
In addition to momentum, we concentrate on two other areas: quality and value. By quality, we mean balance sheets and key performance indicators such as return on equity and return on invested capital.
For value, we utilise critical metrics like the price-to-earnings ratio and, importantly, free cash flow. We seek companies that not only generate profits but also produce substantial cash. This indicates financial stability and the capacity to reinvest in growth opportunities.
Which of your holdings are you most excited about?
I am particularly excited about Jet2, an AIM-listed tour operator that has shown remarkable resilience post-Covid. We’ve known the company for a long time, and it exemplifies our high-conviction investment approach.
When the pandemic hit, Jet2’s share price tumbled as global travel ground to a halt. While others were selling, we took the opportunity to significantly increase our position.
Prior to the pandemic, Jet2 had been gaining market share and was trading exceptionally well. It was also due to benefit from the collapse of Thomas Cook, a significant presence in the UK holidays market.
Our analysis indicated that once travel restrictions lifted, demand for leisure travel would rebound strongly. This thesis has proven correct, with consumers rushing to book holidays as soon as they could travel again. The company remains attractively valued, offering both growth potential and strong fundamentals.
Two other examples would be XPS Pensions, a UK pensions consultant and administrator, which is benefitting from strong and sustainable tailwinds in the pensions industry and has high cash conversion and low capital requirements. I see a long growth runway ahead.
The second would be Warpaint London, which produces highly affordable cosmetics. To date it has been highly successful in the UK and Europe, getting into major retailers, such as Boots and Tesco, but this Christmas it has its first order with Walmart in the USA.
The recent track record of management under-promising and over-delivering on its numbers has led to strong performance, but I still see significant upside.
What is the biggest mistake you’ve ever made in the fund?
Every day as a fund manager is about learning. That said, in nearly 30 years of managing the fund, the number one lesson I have learned is to let my winners run. The corollary of running one’s winners is exiting those companies that are not delivering as expected.
While this has definitely worked over the longer term, the recent huge uptick in M&A (mergers and acquisitions) in the UK market has meant that on occasion I have sold a company due to poor results and backdrop, only for it subsequently to be bid for at a significant premium. Spirent plc springs to mind.
What’s one change you made in the fund recently? Why didn’t you make it sooner?
One recent change to the portfolio was buying Ascential plc. I waited until after the demerger of the digital business from the events business. The Ascential that remained quoted in the UK was an events business with two powerful key brands – Cannes Lions and Money 20/20.
Post demerger, the events business was trading strongly and the valuation for these prize assets was extremely appealing – so much so that soon after I bought the shares, the company got bid for by Informa plc at a significant premium.
What’s the biggest change you’ve seen in the industry since you started?
The Global Financial Crisis was the most significant change I’ve witnessed in the industry. While I had experienced bear markets before, nothing compared to the magnitude or duration of the GFC.
It taught me the importance of maintaining perspective during uncertainty, and not being overwhelmed by negative sentiment. This lesson proved invaluable during the pandemic, where similar market panic resurfaced. Having weathered the GFC, I was better prepared to navigate through it.
As we know, by the time markets are falling, it is far too late to panic. In fact, such market declines can offer an opportunity to expand your positions in the long-term winners, which is exactly what we did. Though difficult at the time, this strategy ultimately proved beneficial for long-term performance.
I recognise that UK smaller companies have been out of favour in recent years, but I believe we’re at a turning point. With interest rates having peaked, I anticipate that capital will start flowing back into UK mid and small caps. The abundance of IPOs in 2021 showed that when market conditions are favourable, opportunities abound.