Looking for unexpected growth

Buying high growth companies is by no means always a winning strategy. Kyle Williams, manager of the UK Equity Growth Fund, explains why he prefers to focus on “unanticipated growth”.

Go to the profile of Kyle Williams
Aug 23, 2018

In April, the JPM UK Equity Growth Fund was added to the FE Invest Approved List and continues to hold a five crown rating.  We outline below why we believe that this is a strategy investors should consider.

Stand out from the crowd

People tend to become very enthused about high growth companies, so there’s a lot of expectation built into share prices. This can easily lead to disappointment. I’d rather look at a company’s prospects. We are most interested when results are beating expectations, guidance is being revised upwards or analysts are appearing more upbeat.  

Behavioural finance theory tells us that new information is only gradually incorporated into stock prices as people take time to update their overconfident views. By applying this theory we can exploit a window of opportunity to buy new sources of growth before it is fully reflected in the share price.  

Opportunities on the high street  

Our approach is fundamentally bottom-up, which means we often find ideas outside the traditional growth sectors.   

The retail sector, for example, is struggling overall as consumers move away from the high street. At the stock level, though, we are still finding opportunities.

In January this year, we established a position in Next, the clothing retailer, noting that the strength of its online presence was helping it to swerve the challenges affecting its peers. We have since been rewarded as the company has delivered better than expected results, and raised earnings guidance, driven by its online directory business.

Reducing exposure to high street banks  

Over the past few months, the fund has significantly reduced its exposure to banks – from a neutral position to 10% below the benchmark.

Notably, we have trimmed exposure to the big high street banks, where we don’t see scope for any meaningful positive surprises in the near future. Conversely, we continue to see opportunities in selected challenger banks, which are seeing strong new business generation despite headwinds such as the difficult environment for the buy-to-let market.

The proceeds of the move away from banks have been reinvested in the energy sector, reflecting the sharp rally in the oil price and a genuine improvement in the fundamentals for the sector. One oil major, Royal Dutch Shell, has seen consensus earnings estimates revised up by 40% this year—precisely the kind of transformation we’re looking for.

Innovation driving opportunities  

One common theme we are seeing is that those companies which are adapting to the environments in which they operate, or who are actively looking at innovative ways to drive their businesses forward, stand to deliver stronger earnings growth.  Those that stand still will struggle to survive.

Take a company like JD Wetherspoons, which was added to the portfolio in September 2016.  This would not be typically thought of as a growth stock. It has, however, been delivering strong organic growth ahead of expectations.1

This is a company that has adapted to the changing nature of the sector in which it operates, banning smoking ahead of the smoking ban and was also one of the first companies in the sector to introduce an app for ordering food and drink from your table, bringing technology to bear on the customer experience.  

Cutting through uncertainty

I believe our approach is well suited to today’s environment. With worries over Brexit and uncertainty over the global outlook weighing on sentiment, investors are less concerned about valuation than at other times, and are instead rewarding those companies that can consistently exceed expectations.

Against this backdrop, identifying growth before the market does, and establishing high conviction positions when we see the opportunity, has the potential to set us apart.  

Over the past five years, the JPM UK Equity Growth fund has returned 63.1%, which compares to 44.8% delivered by the FTSE All-Share index and remains first quartile versus its peers over 1, 3 and 5 years.2


Find out more about our UK capabilities

1The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell

2Source: Source: J.P. Morgan Asset Management. Fund performance is shown based on the NAV of the share class C – Net Accumulation in GBP with income (gross) reinvested including actual ongoing charges excluding any entry and exit fees. Past performance is not necessarily a reliable indicator for current and future performance. Morningstar peer quartile ranking vs. IA UK All Companies universe. Morningstar™ rankings/universe: © Morningstar. All Rights Reserved.   

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Go to the profile of Kyle Williams

Kyle Williams

Portfolio Manager, J.P. Morgan Asset Management


Go to the profile of John
John 6 months ago