Written by Anthony Lynch

September, 2020

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UK Equity Plus – A lot can happen in five years…and a lot did happen

Last week marked five years since we launched the UK Equity Plus strategy. In that time we’ve delivered top quartile performance (compared to the IA UK All Companies peer group), with lower than average volatility. All this despite one of the most volatile macro backdrops seen for some time.

“Volatile” is possibly one of the most over-used words in fund management, and a lot can happen in five years, but it’s probably fair to say that quite a lot did happen in the five years from 2015 to 2020.

Since UK Equity Plus launched in September 2015, we’ve seen a number of macroeconomic and political developments impacting global markets and the UK in particular. Many of which could never have been predicted.

For example, just four days after the launch of the strategy, Jeremy Corbyn was appointed Leader of the Labour Party, advocating policies such as renationalisation. He contested two General Elections, before stepping down.

It would also be impossible not to mention ‘Brexit’, which wasn’t even a word at the time we launched the fund. Having been added to the Oxford English Dictionary in 2016, it has now been voted on, been implemented and, while the negotiations on a new trade deal continue, the end is, at last, possibly in sight.

Globally, we’ve also seen ‘Trade Wars’ take centre stage following the election of President Donald Trump.  This has impacted many of the companies we follow as they look to adjust their global supply chains. Finally, Covid-19 threw a spanner in the works for the domestic recovery that we’d seen emerge in early 2020 massively impacting markets and our daily way of life.

So it’s fair to say that the backdrop has been volatile, particularly for the UK. That’s probably why UK Equities trade at such a discount to other international markets.

Excitingly however, the outlook is rosier. With a relatively stable political back-drop, Brexit approaching its end-game and a nascent economic recovery underway. There will always be unknown unknowns to worry about, but that’s why we take risk management seriously.

But UK Equity Plus has outperformed throughout it all

Despite the VIX1 surpassing its 2008 high in 2020, UK Equity Plus has successfully delivered top quartile performance, with lower than average volatility [versus peer group] since inception. Performance is ahead of the benchmark (the FTSE All-Share index) over 1, 3 and 5 years. The fund has also outperformed the benchmark in 70% of quarters since inception, demonstrating remarkable consistency of returns.

That reflects not only a successful stock picking-process, but, particularly given the macroeconomic and political backdrop, an approach with risk management at its core (not unlike the approach required with any five year old!).

By accessing an alpha source that most other funds can’t

So what’s the secret formula? The answer – active extension, or in other words, the ability to short the stocks we don’t like, as well as buy the ones we do.

An ever changing macroeconomic backdrop will always throw up change. That’s why we aren’t tied to any one style, such as ‘deep value’ or ‘quality growth’. By simply looking to identify the winners and losers within each sector we can reduce macro volatility and maximise returns from stock selection.

Shorting 2, or benefitting from shares which underperform their sectors, has contributed around two-thirds of our outperformance since inception and has been particularly useful in years such as 2020 where structural change has accelerated.

Which is a particularly valuable tool in the UK

Identifying the winners and losers is only half the job – you then need a fund structure that can take advantage of both.

Active extension is particularly useful for investing in the UK FTSE All-Share market where, if you exclude the largest 20 stocks, the average index weight is less than 9 basis points. In other words, as a long only investor, it’s very difficult to generate relative performance from the vast majority of your underweights, no matter how much they individually perform.

In UK Equity Plus, by introducing shorting, we can extend the underweight in our least favoured stocks up to 1% and reinvest this capital into the stocks we like the most.

So here’s to the next five years

Such momentous change is bound to throw out winners and losers and some commentators have highlighted the recovery from Covid-19 as being ‘K’-shaped, i.e. with diverging fortunes for different types of companies, rather than a ‘V’-shaped recovery, or a rising tide that lifts all boats.

With a strong track-record in volatile market conditions and designed to benefit from divergence in company fortunes we are even more excited about the outlook for the next five years.

1 VIX – An index which measures volatility and based on the market’s expectation of 30-day forward-looking volatility.

2 The possible loss from taking a short position on a security (using financial derivative instruments) may be unlimited as there is no restriction on the price to which a security may rise. The short selling of investments may be subject to changes in regulations, which could adversely impact returns to investors. In UK Equity Plus, by introducing shorting, we can extend the underweight in our least favoured stocks up to 1% and reinvest this capital into the stocks we like the most.

For Professional Clients only – not for Retail use or distribution.

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Prior to any application investors are advised to take all necessary legal, regulatory and tax advice on the consequences of an investment in the products. Investment is subject to documentation, which is comprised of the Prospectus, Key Investor Information Document (KIID) and either the Supplementary Information Document (SID) or Key Features/Terms and Conditions. These documents, together with the annual report, semi-annual report and instrument of incorporation are available free of charge from JPMorgan Asset Management (UK) Limited. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. 0903c02a829e9959

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