JPMorgan asserts its Peg fund has outperformed its FTSE All-Share benchmark in each of the 14 years since it was started, but, as Kira Nickerson discovers, it hasn't always been plain sailing
The Save & Prosper Premier Equity Growth (Peg) fund is a name from the past for most intermediaries - a core UK equity holding through much of the early 1990s. But while it may appear to have disappeared off the radar screens, despite the numerous name and manager changes, the portfolio still exists and has continued to be managed in the same fashion throughout the past 14 years.
Now called JPMorgan Peg, the fund has some £718m in assets and currently sits at the bottom of the IMA's UK All Companies sector over the three months to 9 July - and also does over one and three years, although is third quartile over five years to the same end date. Although within this time frame the fund may have underperformed the average portfolio in the broad UK All Companies sector, it is not to say its performance has been dire - the fund gained 72.3% over the five years to 9 July on a bid to bid basis, according to Morningstar data. According to JPMorgan itself the fund has outperformed its benchmark, the FTSE All-Share, in 14 out of 14 calendar years on a gross of fees basis, and 12 out of 14 on a net of fees basis.
Still, the managers admit that more recently the fund has struggled somewhat relative to its peers, noting its rolling returns have been hurt due to a poor year to date performance. Even though the fund aims to be relatively style agnostic, over recent months this has actually worked against it. Paul Shutes, client portfolio manager at JPMorgan, notes the fund is managed using the philosophy of creating a fund that looks and acts like a 'super' stock. In other words, if you sought out the ideal stock you would want it to be fast growing, cheap with good news flow, but the market is not efficient enough to allow you to find just that in all conditions, he notes. "Some stocks will be cheap, but could be a value trap, some will have strong growth," he says. "So we try to combine stocks to create better growth, stronger news flow and cheaper than the average stock."
In examining the market and what has outperformed, JPMorgan points out that cheap will outperform expensive and strong momentum will outperform weak momentum, meaning that as managers they seek out both value and growth to provide a balance. "Few know when is the right time to switch between the two," Shutes comments. As such value and growth stocks are kept at an equal weighting within the 180 stock portfolio, which aims for consistency.
An initial screening on the fund's universe ranks the stocks and then on a daily basis the UK equity team trolls through the valuations looking at news flow and making adjustments to these numbers, Shutes explains. It is the managers' responsibility as to the exposures the portfolio ultimately has in the individual companies. While individual stock positions can be as small as 30-50 basis points, top positions can appear concentrated, with the top 10 in the fund making up 37.3% as at 30 June 2007. The smaller companies' positions in the fund are accounted for through a position in JPMorgan's own smaller companies fund and is kept to a neutral weighting to the larger index, at around 4%, Shutes says.
If examining the top 10 holdings it is easy to see why some might consider the portfolio to keep almost too close an eye on its benchmark index. As of 30 June eight out of 10 of the fund's top 10 positions are also among the top 10 in the FTSE All-Share. The two exceptions in the fund are a 3.4% weighting to JPMorgan UK Smaller Companies fund and a 2.9% position in HBOS.
But JPMorgan Peg is also making bets within its top 10 with not one of the eight holdings featuring a similar weighting to the index position - the closest exception being the fund's 5% stake in BP versus its 5.7% weighting in the FTSE All-Share.
Turnover levels within the portfolio tend to be around 100% and the sell discipline used is the exact opposite of the buy side - meaning stocks featuring excessive values, poor or changing news flow, or earnings downgrades or profit warnings are examined for redemption. "We always try to ensure we do not fall in love with stocks," Shutes says.
He says this style was introduced in 1993 and has supported the fund through value and growth periods, as well as a market which has favoured small caps versus larger companies, to which the fund has a more natural bias. It is this that has caused the fund to falter year to date. "Our process balancing value and growth works well in the bottom four-fifths of the market but hasn't worked well in the largest stocks - the mega caps," he adds.
In examining the mega cap weightings, Shutes notes banks came into the fund as they looked good value but they have been negatively impacted by concerns over the US sub-prime mortgage market and any potential knock-on effect this might have in the UK. At the same time the fund has been underweight oils as the managers had concerns over production numbers and reserve replacements, meaning that the story for oil looked weak. Yet oil stocks have moved with the increase in oil price so the underweight position has hurt the fund, he says. Another wrong call in the megas was with Vodafone, which Shutes admits looked good value but as its results were a bit hit and miss the managers decided to underweight the giant telecom. "The market was more optimistic and saw through the noise," he says.
One positive position the fund has maintained has been its underweight position in pharmas, which while a positive contributor to performance has not been sufficient to counter the hit taken by being overweight banks and underweight oils, Shutes says.
More recently managers Michael Barakos, Chris Complin and Nadia Boulila have taken off some of the position in banks but remain overweight based on valuation terms. "Oil - while we like some we're less convinced by the majors and we remain underweight pharamas and household goods," Shutes says. As of 30 June the fund's largest sector position remained financials at 38% followed by industrials at 14.3% and oil and gas at 10.2%.
Complin is the longest-standing manager on the fund, having worked on the portfolio since 2002 when former manager Andrew Spencer, who had worked on the fund from 1992, left. Complin then ran the fund alongside James Elliot, who left in February 2005, which is when Barakos took up his responsibilities on the portfolio. Shutes says Boulila has worked with Barakos and Complin for a number of years but only became a named manager last year n
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