The Long and Short of it: Review of Markets June 2019
The cricket world cup is well underway. Office workers across the UK can be found earphones in, listening to TMS, looking vacantly at monitors that have long since gone to the screensaver
The cricket world cup is well underway. Office workers across the UK can be found earphones in, listening to TMS, looking vacantly at monitors that have long since gone to the screensaver. England went into the tournament as world number one and favourites… never a comfortable position for an English team to find itself in. After a couple of ropey performances they successfully shed the tag and are now a team striking back against the critics; a position that is suiting them far better. In my day I used to bowl a bit of left arm slow-medium. I wish I could have delivered a bit of kiss the surface away swing but my only variation was pie or pea roller. Watching elite sport and particularly in a cup format reminds me of how pressure can make what would normally be simple suddenly insurmountable. When the pressure comes on having a tried and tested process can be incredibly useful. Whether it’s a batters routine as they wait at the crease for a ball to be flung down to them at 90mph or a rugby goal kicker shimming out the nerves as they picture the ball sailing through the posts (see Dan Biggar for a particular powerful [dance] routine). The investing equivalent can be just as helpful. Our teams behavioural finance process has been around since 1995, which gives us confidence that, even in challenging times, staying true to the process will deliver. This is well demonstrated by the strong YTD performance we have experienced after the challenges of Q4 2018.
Equity markets bounced back well in June and in some regions are hitting new highs at the start of July. What’s changed month on month. Not a lot really. Some evidence of willingness to restart Sino-US trade negotiations and further evidence of dovishness within central banks. Don’t fight the Fed remains the mantra of the market. Meanwhile actual economic data is pretty uninspiring in most of the world.
In this topsy turvy environment we continue to think sticking to what you do know in your portfolio is key and try to balance the unknowable macro risks and their interaction with markets.
Liquidity has recently been an area of concern for investors. We have always had it front of mind in our funds. We only hold publicly listed stocks and typically keep positions to around 1 days trading volume; giving us the ability to be agile to client needs and indeed to the changing dynamics of the stocks we invest in.
The Long & Short has a retail vibe to it this month. It is clearly an incredibly tough space at the moment as a confluence of structural changes in the way we shop and cyclical headwinds from low consumer confidence. In 2018 more retail space was lost than in any year since 2008 and a number of high street favourites have slipped into administration (Toys ‘R’ Us, HoF and Maplin to name a few) (Source Centre for Retail Research). However, it is difficult for long only investors to express much of a negative view. The whole FTSE General Retail sector makes up a mere 1.56% of the index across 26 stocks (Source Bloomberg 03/07/19). This is less than media company Relx’s index weight (Source Bloomberg 03/07/19)! Retailers in other sectors also tend to be mid and small caps that have low index weight. In UK Equity Plus we can use our ability to short to take meaningful positions in some of these challenged retailers, giving us a far greater opportunity to generate returns for our clients.
Games Workshop. Slightly cheeky as it is in the Leisure Goods sector but Games Workshop is at heart a retailer of miniature figurines to hobbyists. The company has been on a huge tear since management reoriented focus to customer engagement, new products and expanded their facilities. Since then the company has consistently beaten expectations leading to upgrade after upgrade and fantastic performance. In June they confirmed they are continuing on this growth trajectory, driving the share price up 11% (Source Bloomberg).
AO World. As an online retailer you may have thought they would have been immune from the challenges experienced by bricks and mortar retailers. However, growth has not been as rapid as expected and with the wafer thin margins on delivery of third party white goods has meant the company is yet to deliver a positive profit since it listed in 2014. In June they delivered another disappointing set of results leading to the share price falling 35% over the month (Source Bloomberg).
We have been short in JPM UK Equity Plus since the fund launched on the 8th September 2015 when the share price was 151p vs 70p today (Source Bloomberg 04/07/19).
Callum Abbot is a portfolio manager for the JPM UK Equity Plus Fund and the JPM UK Equity Core Fund.
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