Half-year results for Jupiter US Smaller Companies (JUS) show the investment trust lagged its benchmark, the Russell 2000 index (adjusted to sterling), by 3.2% in the six months to 31 December 2017, extending a prolonged period of underperformance.
Its fund manager, Robert Siddles, jumped ship to Jupiter Fund Management from F&C Investments in January 2014, bringing the trust with him, and the timing of his move pretty much marked a change in the fortune of the trust. It lagged its benchmark by 39 percentage points over the period from 28 April 2014 to 9 November 2017. However, this is just coincidence.
In the second half of last year the trust’s board responded to the underperformance by conducting a review. This concluded that ‘a number of areas in the portfolio … had negatively impacted investment performance. These included the selling of successful positions too soon, the tendency to retain poorly performing stocks for too long and trading the portfolio too quickly’.
The board has asked Siddles to address these points and manage JUS with a more concentrated portfolio. The number of holdings fell from 58 to 46 by the end of the year.
Siddles has managed the trust since 2001. Morningstar doesn’t have data for the benchmark before July 2002, so we have to compare it against the S&P 500 index since then. Over this period, the manager has turned £100 into £468 while an investment in the index would have turned £100 into £448. It is not a huge outperformance although we may already be seeing a resurgence.
I draw a few conclusions. First, in the period of economic recovery post the tech boom, the fund outperformed. The fund’s relative performance looks quite poor in the run up to the credit crunch but it did phenomenally well as the bubble burst. It held its own for a while but as markets soared it started to fall behind. Finally, since 9 November, its performance has turned a corner.
The cyclicality in Jupiter US Smaller Companies’ performance is a function of Siddles’ investment style. His conservative, risk averse approach aims to achieve long-term capital appreciation while preserving capital in market downturns. He likes companies with strong, defensible market positions, high free cash flow and trading on low valuations. This eliminates most companies in sectors such as technology and biotech, two areas that have been in favour in recent years.
Siddles’ approach works well when markets are panicking but, when investors get over exuberant, his style is not in favour and he tends to lag behind. This cyclicality of performance is common to a number of funds. The great danger is that investors get despondent and sell at the bottom or, worse, managers get fired or are forced to change their investment approach just as their style is about to come back into favour.
So, by tinkering with the investment approach, has the board endangered, or cut the legs out from under, any prospect of a recovery for Jupiter US Smaller Companies? My hope is that they have not.
Amazingly, most members of the five-strong board pre-date Siddles. Chairman Gordon Grender, senior independent director Norman Bachop and chairman of the audit and management engagement committee Peter Barton have sat on the board since October 1998, February 1999 and February 1998 respectively. I wonder if, on average, this is one of the longest serving boards in the sector?
There are many people who think that directors should move on after nine years but not everyone agrees. There is a valid argument that having some directors who have shepherded a fund through an entire market cycle is helpful. In this case, these three directors and Clive Parritt, who joined the board as a non-executive in January 2007, will have experienced the highs as well as the lows of Jupiter US Smaller Companies’ long history.
My guess is that, subject to the refinements that they have suggested, they will trust in Siddles’ judgement and hopefully the trust will reap the reward when markets turn more decisively than they have already in 2018.
If you aren’t a fan of Siddles’ approach, it looks as though you might, finally, have an alternative in the form of the new issue from Baillie Gifford. A few weeks back I lamented the lack of choice available in the US, asking ‘why is there no fund with a punchy growth style?’. Well Baillie Gifford US Growth Trust should fill this void. I hope its launch is successful.