One of the outstanding long-run performers in the Investment Association’s UK All Companies sector is Jupiter UK Special Situations (B4KL9F8), the £2.1 billion fund managed by Jupiter Asset Management.

Adorned with a five-star Morningstar rating and a Gold Morningstar analyst rating, the fund is ranked first quartile over one, three, five and 10 years, and year-to-date.

It is managed by the highly-regarded Ben Whitmore (pictured), who seeks to generate a higher return than that provided by the FTSE-All Share index over at least five years and deliver capital growth by exploiting ‘special situations’, which means UK companies he considers to have undervalued share prices.

Jupiter UK Special Situations has delivered an impressive 10-year annualised total return of 7.3%, which rises to 18.6% on a three-year basis as value investing has enjoyed a renaissance. This is comfortably ahead of Morningstar’s UK Large-Cap Equity category over both timeframes.

DISCIPLINE AND PATIENCE

‘We are value investors,’ Whitmore informs Shares. ‘We believe that valuation is the key determinant of future returns and there’s a lot of evidence around value investing over time.’ Disciplined and patient in their search for value, Whitmore’s team use statistical techniques to ‘screen’ companies for certain characteristics and narrow their search for the best value opportunities.

They look for low valuations as their starting point using a couple of screens. The first is a Benjamin Graham and David Dodd-inspired screen, popularised more recently by Robert Shiller as the cyclically-adjusted price to earnings CAPE ratio, while the second is based on the methodology of successful investor Joel Greenblatt.

‘One of the things Graham and Dodd suggested is you want to look at a company’s earnings power across a business cycle,’ explains Whitmore, who looks at valuations on 10-year average earnings. The Jupiter stock picker doesn’t waste time over macroeconomic forecasting. ‘It is too difficult,’ he says. ‘The area to concentrate on is individual companies.’

He focuses on screening for ‘out of favour, lowly valued’ but strong-at-heart businesses which he believes will be rerated over time. As at 28 February 2023, the fund was spread across 48 holdings, the bulk of them large and mid cap companies.

These companies have become lowly valued for different reasons, falling out of favour with investors because profits are falling or ‘the stock market doesn’t like them, and that might be caused by bad management or just the economic cycle’, he continues. ‘What we tend to find is that unpopular shares have got problems or some issues and that can often lead to a change in management.’

NUMBERS OVER NARRATIVE

Jupiter UK Special Situations’ consistently robust returns are all the more impressive given the five years to 2020 was ‘the worst period in financial markets history going back to 1920 for value investors versus growth investors’, according to Whitmore. Value investors just have to accept there will be periods when their style is out of favour. ‘For us, it is about trying to be very consistent with the philosophy and process,’ he stresses.

There will be periods when ‘judged against the index, we look not very good, periods when we look better, but cumulatively over time, we have shown that our philosophy and process adds up to a good outcome’ for investors. Rather than a ‘buy-and-hold forever investor’, Whitmore waits for extreme undervaluation to normalise and says the sweet spot for the companies he invests in, ‘if we’re correct, tends to be 18 months to three years’.

Whitmore is also ‘a great believer in the numbers not the narrative’, refusing to be unduly influenced by CEOs with the gift of the gab. ‘Meeting management when they are new to a situation is quite helpful because they give you balanced account of the business,’ says Whitmore, but he has become more nervous about putting too much faith in what management have to say about the future.

‘We want to see the 10-year history in terms of numbers for all companies we consider.’

The Jupiter man starts with forensic scrutiny of the balance sheet, the cash flow statement and the profit and loss account. The focus is purely on the statutory numbers not those which have been adjusted by management.

PORTFOLIO POSITIONS

Jupiter UK Special Situations is invested in names ranging from energy giant BP (BP.) and mining group Rio Tinto (RIO) – to banking provider HSBC (HSBA), insurer Aviva (AV.) and drugs specialist GSK (GSK).

Interestingly, Whitmore sold shares in Sensodyne-to-Panadol maker Haleon (HLN) following its spin-out from GSK as they were ‘too expensive for us’ and he saw ‘better opportunities’ elsewhere. Among the strong recent contributors is BAE Systems (BA.), the defence giant that has been ‘sharply reappraised as to the valuation of its franchise’. Whitmore initiated the position in the FTSE 100 firm ‘about four or five years ago’ when the shares were very lowly valued and seen as ‘exceptionally dull, but people now understand that the defence of the free world is very, very important’.

While at least 70% of the fund is invested in UK stocks, up to 30% of the portfolio can be allocated to other assets including overseas-based companies. Whitmore initiated a position in microchips giant Intel (INTC:NASDAQ) in 2022 on the basis of its strong franchise and attractive valuation.

Intel’s poor performance over the last six to nine months reflects worries about a correction in demand for PCs and Whitmore recalls that Intel slipped up and lost its way about five years ago, making missteps in its process technology and losing the lead over Taiwan Semiconductor Manufacturing Company (2330:TPE).

But new management led by CEO Pat Gelsinger is trying to ‘put Intel back on a better path’. Patient investor Whitmore believes that if Intel can turn things round, the upside is ‘very considerable’ and if not, the downside is ‘limited’. His team are always thinking about the ‘asymmetry of risk/reward and trying to find companies where we think the upside is a multiple of the downside’.

One rival fund manager recently described Imperial Brands (IMB), a top 10 position in Jupiter UK Special Situations, as a ‘burning platform’. The thoughtful Whitmore concedes that tag would have been accurate a few years ago, but the cigarettes maker is now on a firmer footing, able to make investments to help it transition from a heavy reliance on cigarettes to next generation products.

Previously, Whitmore observes, the Davidoff, John Player Special and Lambert & Butler maker was losing market share in most of its key markets and spending money, not very wisely as it turned out, on next generation products.

But new management, steered by CEO Stefan Bomhard, have got to grips with the business in Whitmore’s view and Imperial is now taking market share in aggregate across its top five categories, not in each one, but in aggregate, and the fundamentals of the business are much improved in terms of how it is run. Imperial Brands was late to next generation products, but Whitmore notes the new management team is ‘trialing and testing and launching, and they want to be a “fast-follower” in heat-not-burn, vaping and oral’.

NERVES OF STEEL

Whitmore’s other holdings include HSBC, the global banking giant whose UK subsidiary recently stepped up and paid £1 to take over the UK arm of Silicon Valley Bank.

He points out that in the last six years, SVB was growing its assets very fast, by 30% per year in fact, and ‘very fast growing banks or insurance companies are dangerous’. He notes in contrast that HSBC’s balance sheet has hardly grown in the last six years. ‘Well-run banks can deliver good returns,’ he argues.

He is also backing new management to turn things round at Smith & Nephew (SN.), the medical devices company where one of three divisions has proved problematic. ‘Two of the divisions have done very well – Advanced Wound Management and the sports injury business (Sports Medicine),’ explains Whitmore, adding that the Orthopaedics business has been poorly run.

He also points out that Smith & Nephew has had too much inventory, what it had got wasn’t in the right place, and Smith & Nephew hasn’t been able to provide the right inventory sets to the surgeons at the right time, especially in the US. ‘That has meant that when procedures were fast to recover post-Covid, Smith & Nephew did not recover as fast, but the new management team has got a plan to put that business back into a better position.’

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