Written by Jennifer Hill

July, 2020

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Smaller companies to own for after the crisis

Companies might struggle to post profits this year, but JPM UK Smaller Companies fund manager Georgina Brittain has her sights set on 2021 and beyond.

‘Don’t just think about the here and now,’ she said. ‘This year will be a write-off in profit terms for some companies, but what will the competitive situation look like after Covid?’

In undertaking a rigorous re-evaluation of the portfolio, the smaller companies veteran has strived to maintain balance. She still owns select retailers, like value-for-money home furnishings chain Dunelm, while selling less compelling ones like sofa maker DFS, and has retained travel group Dart, which owns airline Jet2 and package holiday operator Jet2holidays.

‘At the other side of this, which is what we are focusing on, are people still going to go on holiday? Of course they are,’ she said. ‘Less than a year ago Thomas Cook went under and that changed the entire competitive environment for winners like Dart Group. It might feel uncomfortable [to own shares in it] now, but this too shall pass.’

The fundamental shape of the fund remains unchanged since the start of the year. That is not to say that Brittan has been inactive.

Amid March’s stock market sell-off she added to Dunelm, which had been trading ‘incredibly well’ prior to lockdown, leading to a number of earnings upgrades, and has since benefitted from demand for low-cost home improvements and clever use of technology. In June, it started trialling a video shopping service.

She also added to video games developers and publishers Team17, Codemasters and Frontier Developments, companies that have already generated ‘incredibly good money’ for the fund thanks to a change in business model. While games companies previously had to estimate stock and reduce prices if they over-ordered, digital distribution has seen profitability soar. At least some of the increase in demand they have enjoyed during lockdown is likely to remain.

‘Some people who weren’t previously gamers are now gamers and habits can be hard to break,’ said Brittain.

She also initiated a new position in Gamma Communications, a telecoms provider to the UK and Dutch business markets which hitherto ticked all her boxes other than valuation. ‘Communications and technology are coming to the fore,’ she said.

Plenty of value

One of the most significant changes she has seen in 22 years of running the fund is the speed of market movements. During the financial crisis it took six months, from September 2008 to March 2009, for markets to rebound – rapid by historical standards. This year’s market crash and recovery happened within a month. ‘We only see that getting faster and faster,’ she said.

Her adherence to the investment process and ‘obsession with numbers and data’ has remained the same, however. In selecting stocks, she looks for three factors – value, quality and momentum. Some holdings exhibit only one or two, but the portfolio overall displays all three.

She looks for high levels of free cashflow, return on invested capital and return on equity, as well as strong price and earnings momentum. ‘When we come out the other side a lot of our companies will be better, stronger with less competition and valuations will be compelling. Looking to 2021 we see plenty of value.’

In the year 2030

In 2030 Brittain will be investing in themes she can’t envisage today. ‘We’ll get to see them first – the new IPOs that will develop into serious themes. That is one of the excitements,’ she said. Relating that to the past, she gives the example of video games developers, which have gone from one-man bands to highly profitable operations with global customer bases thanks to the rise of digital distribution.

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