Seismic shifts in the way the world works – from flexible working to online shopping – bode well for JPM UK Equity Income, which looks across sectors and the market capitalisation spectrum to capitalise on trends such as digitation and low-cost home ownership.
We asked co-manager Katen Patel to outline long-standing and more recent stock picks across the fund’s three buckets – high growth companies that pay little or no dividends, quality compounders that are growing their dividends from a relatively low base and high yield stocks in more mature markets.
HIGH GROWTH
Team17, a global computer games developer and publisher, is a long-term high growth holding. It is best known for the Worms video game franchise, which has sold more than 75 million units since its first launch 25 years ago. The firm designs, acquires and publishes video games, reviewing up to 900 ideas per year and bringing a handful of them to market. ‘Its success rate has been astonishing,’ said Patel, who bought into the company shortly after its IPO in May 2018. It has been a huge beneficiary of lockdown and significant contributor to the fund over the past year – up 123%. Its shares are yet to pay a dividend.
Avast, a cybersecurity software company, was added at the end of last year. It debuted as the largest European technology IPO on the London Stock Exchange in May 2018. It came out of private equity so had debt on the balance sheet but is now at a stage where it can start to grow the dividend. It has operating margins of 50%-plus and been paying down debt. It is benefitting from people working from home. Future growth is expected to come from people spending an increasing amount of time online and hackers becoming more sophisticated.
COMPOUNDERS
Computacenter, a provider of IT infrastructure and services across Europe, is benefiting from the trend towards digitalisation. Over the last few months, it has benefited from companies upgrading their systems to allow people to work from home. ‘In an increasingly digital world businesses want the right technology and Computacenter offers a one stop shop,’ said Patel. Its shares yield 2.5%.
A position in Qinetiq, a security and defence company, was initiated in the third quarter of last year. It is using its large cash pile to expand overseas – it has made one large acquisition in the US – and pays a modest and rising dividend, currently equating to a 2.5% yield. ‘It is being very disciplined on the price it pays for acquisitions – if it doesn’t find an attractively priced acquisition I would expect them to return cash to shareholders,’ said Patel.
HIGH YIELD
MJ Gleeson, which specialises in low-cost house building, has been owned by the fund since it launched in May 2017. The company takes a disciplined approach to housebuilding and constructs properties with an average selling price of £130,000. It has a strong management team, large land bank, high operating margins of 15-20% and generates a lot of cash, resulting in a yield of 5%.
Urban Logistics, a real-estate investment trust, is a more recent addition. It was acquired during a placing in February that raised £130 million, significantly more than a £100 million target. The company owns and operates a portfolio of small warehouses across the UK and yields 6%. ‘Some parts of the property market are suffering, but this is an example of a company benefiting from the trend towards online retail and very long-term rental agreements with stable tenants like Hermes and Tesco,’ said Patel.
In the year 2030
The energy revolution is another theme that the fund is exposed to. Large oil and gas companies like BP and Royal Dutch Shell could be beneficiaries – they have the capital to invest in emerging technologies. They are both in its top 10, while Greencoat Renewables is a smaller holding. Miners like Rio Tinto and Central Asia Metals could also benefit from demand for copper, a significant component in the manufacture of electric vehicles.
