Jupiter UK growth fund’s Steve Davies sees opportunities in UK high street banks and says contrarian sectors will outperform

1st July 2013

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The Mindful Money fund manager interview

The £878m Jupiter UK Growth Fund see opportunities in troubled banking sector. The managers take an unconstrained approach to stock-picking, so they have access to the whole market and are not bound by a particular style or size of company to invest in. They have the freedom to select stocks for the portfolio – whether they are growth, value or recovery stocks – according to their view of the UK market. The fund is quite focused, currently holding only some 43 stocks.

Right now, the managers are see opportunity in the UK’s banking sector with Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group counting among the managers top-10 stock picks.

Over the past year, the fund has achieved a return of 47 per cent for its investors, while the average UK fund delivered 31 per cent. Over three years it is up by 60 per cent against a mean of 45 per cent.

Steve Davies, (pictured) who co-manages the portfolio alongside Ian McVeigh explains the fund’s style and discipline to Philip Scott.

How do you pick stocks? What are the three main characteristics you look for?

“We split the market into growth stocks on the one hand and value/recovery on the other. On growth, we think the market tends to be better at valuing growth in the shorter term but not so good further out – this is where we can take advantage. When it comes to value, we believe the market tends to right-off companies as not suitable for investment far too quickly – what we try to do here is spot the difference between value opportunities and value traps. Finally, we have our own two-year price targets for all our holdings, so we can deploy our funds where we see the greatest upsides.”

Where do see opportunity right now?

“We believe that UK banks present the best value opportunities at the moment notwithstanding the fact that Lloyds has doubled over in the past year. Over the long term they have a way to go up. We have also thought for a while that the UK domestic economy could recover faster than expected. We particularly like retailers such as Dixons and Howden, and leisure companies such as Thomas Cook.”

What risks concern you the most?

“We are concerned about the sharp rise in bond yields and have positioned our funds accordingly. The slowdown in emerging markets is another worry although we are very underweight commodities. These are risks we have been able to manage through stock selection.

“Looking ahead, other risks include the potential impact of further political turmoil in the EU, especially with German elections on the cards for next year. We also worry about the possibility of a spike in oil price should we see further upheaval in the Middle East.”

What are the most common mistakes you feel investors tend to make?

“Following the pack – herd mentality can be damaging whether you are following the crowd in an up or down direction. You have to think to long term and try and ignore the noise in the market.  Another mistake to avoid is falling in love with stocks that have done well for you in the past – this is where our price targets are so important; we are continually reviewing them against our earnings forecasts to ensure that a stock still deserves its place in our portfolio”.

What your overall outlook for the market?

We expect volatility in the short term while the quantitative easing tapering debate is in full flow but still see plenty of exciting opportunities in UK equities, both in absolute terms and relative to asset classes. We think there is a need to focus on contrarian sectors in order to outperform.

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