manager of jupiter primadona growth investment trust clears out many large and small-cap holdings to take a more defensive position
Jupiter fund manager Paul Sheehan has shifted the focus of the £38.3m Jupiter Primadona Growth investment trust up the market cap scale as part of a defensive strategy.
Sheehan, who also runs Jupiter's £47.1m Growth & Income fund, took over management of Primadona from Justin Seager in June and immediately set about cleaning house.
He has cleared out residual holdings in poorly performing stocks, bought higher-yielding shares and moved out of some large-cap FTSE sectors and small-cap holdings.
'We are in a period of pretty cautious markets as it seems to be a prolonged business downturn, particularly for companies exposed to capital expenditures,' Sheehan said.
He has repositioned the portfolio into mid-cap stocks with higher dividend yields and visibility of earnings, rather than those more reliant on winning contracts or otherwise exposed to capital expenditure cycles.
'If there is not going to be an automatic recovery in spending and business revenue like we have seen in other recoveries, we need to take some action.
'So I have reduced the P/E of the portfolio, increased the yield by buying more in mid-cap and reducing some of the small companies, and generally taking a more cautious view of the market and of the cycle.'
Attractive yields are beginning to appear in sectors from which they have long been absent, Sheehan said, inflating the number of possible investment targets for his fund.
'It's quite interesting to look at the sorts of stocks that, until relatively recently, were seen as growth companies and are now being rated as ex-growth. The universe of potentially interesting yield stocks has widened but you have to be careful about which ones you buy,' he said.
Sheehan said it is important to consider not only the level of the yield but whether the company has sufficient growth and capital to support or even grow its dividends.
Sheehan nominated Lloyds Bank as one stock lately offering substantial value.
'Lloyds Bank now yields more than cash, gilts and even more than its own corporate bonds, so the equity holders are more pessimistic than the bond market, which isn't usually the case,' he said.
'We think they can support the dividend with the profitability in the business. That's the sort of thing we're looking at.'
Sheehan said he had invested more of the UK portfolio into housebuilding and smaller energy stocks, which he expects to become more valuable during the race to replace oil revenues, ports, Irish banks, insurance brokers and some niche financial stocks.
He has been steering clear of hire businesses, support services, recruitment stocks, technology and stocks related to the pharmaceutical and biotech industries.
'I'm avoiding those areas that need a buoyant economy and capital spending cycle to get their revenues going,' he said.
Over the 12 months to 3 September, the trust is down 31% in NAV terms and is trading on a discount to NAV of 13.4%.
'The performance has begun to improve on a relative basis, although with markets being down we can't fully buck that trend.
'But it does look as though we're beginning to turn things around,' said Sheehan.
The portfolio consists of around 75% UK equities, with the remainder in Europe, North America and Japan.
The overseas exposure is gained via managed funds including Jupiter's own European Opportunities and European Special Situations portfolios.
Sheehan said he will stick with this method of acquiring foreign equity exposure, although he has left the door open to make his own overseas stock selections, as he does in the UK.
'If I see individual opportunities, I can do it but, at the moment, we're going to stick with the structure we've got because it's worked for us,' he said. 'I am pretty cautious about markets around the world and I don't feel I'm seeing enough value on a bottom-up basis to really take a big exposure in overseas markets.'
Sheehan's caution is illustrated in his conservative financing, with a modest overdraft he describes as 'nothing worth mentioning' and minimal gearing.
'The gearing is slightly more than the cash at the moment but, with our market view, we're not looking to gear the trust at all,' he said. 'We are looking to remain basically fully invested.'
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