Written by Jennifer Hill

April, 2020

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Buying the comeback kings

Bus operator National Express, fashion retailer Next and airline Wizz Air are among the ‘quality’ businesses that JP Morgan fund manager James Illsley, who holds a Citywire + rating, has been buying at knockdown prices.

They stand to be the comeback kings in their respective sectors in a post-lockdown world when travel routes reopen and consumers resume both essential and discretionary spending.

Shares in National Express, which derives most of its revenues from non-discretionary travel such as commuting, were worth as much as £4.75 in January but plunged to 90p in March and have already bounced back to around £2.30.

‘It was at the centre of investor fears when the crisis first erupted,’ said Illsley, one of four managers named on the JPM UK Equity Core fund. ‘While the world may look different when we come out of this pandemic, consumers are creatures of habit. People will need to go to work and there will be lots of pent-up demand for leisure pursuits – for family travel, eating in restaurants and going shopping.’

Illsley and his co-managers have been adding to well-financed, well-run businesses, but have been doing so at the margin and building positions slowly, in order to average out prices amid the heightened volatility that continues to pervade investment markets.

‘We’ve been very fortunate to see continued inflows to the fund, which has given us some free turnover to allocate to value opportunities with robust liquidity. Value works over the long haul provided you apply the rigour that we do to our process.’

Key characteristics

Although value as a strategy has struggled in recent years, and in recent months in particular as investors seek security of capital, indiscriminate selling has pushed the valuations of many quality companies into ‘right-price’ territory. Value and quality are two key characteristics that Illsley and his co-managers favour, with a third being momentum.

‘We aim to combine a strong quantitative backbone with a large, dedicated UK equities team that scours the market for interesting opportunities,’ he said.

JPM UK Equity Core is designed to be a low active risk fund that can sit at the core of a client’s portfolio, flanked by more specialist satellite funds, and be accessed at low cost – charges are 0.33%.

It is diversified across more than 150 stocks spread across the FTSE 350 with exposures mirroring the FTSE All-Share’s – 80% large cap, 16% mid-cap and 4% small cap. Typically only 20% of the risk budget is spent on sector allocations, with the rest going on stock selection – ‘buying the right housebuilder or the right bank with the attributes we look for,’ as Illsley puts it.

‘The macroeconomic situation and politics are so hard to predict – whether it be Brexit or this pandemic,’ he added. ‘Things come out of left field and if you have big sector bets you can be on the right or wrong side of them.

‘We prefer not to take that kind of risk. We prefer to focus our time on the activities that can earn us the biggest rewards for the work that we do – that’s what drives us.’

In the year 2030

Companies that have low requirements for capital and high levels of intellectual capital stand out for Illsley as stocks for the next decade: ‘Whether the pandemic will roll back globalisation, we’ll have to wait and see, but a premium is being put on intellectual capital.’ He sees this across many stocks and sectors from Games Workshop, a manufacturer of miniature wargames which he likes for its strong niche franchise, to JD Sports with its strong relationships with key athleisure brands and Aveva whose engineering and industrial software is driving digital transformation across the asset and operational life cycle of capital-intensive industries.

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