CFP SDL UK Buffettology is one of the best-known funds in the IA UK All Companies sector, and for good reason.
By following the principles espoused by Berkshire Hathaway chairman Warren Buffett – buying and holding companies with “economic moats”, which stop competitors muscling in on their territory, allowing them to maintain a high return on capital – manager Keith Ashworth-Lord has taken the fund to the top quartile of the IA UK All Companies sector over three and five years, and the number-one position over the past decade.
However, according to FE Analytics data, it celebrated its 10-year anniversary on 28 March this year in second place after it was knocked off the top spot by a smaller and less well-known fund: Jupiter UK Dynamic Equity.
Best-performing IA UK All Companies funds 28/03/2011 - 28/03/2021
Source: FE Analytics
Like Buffettology, Jupiter UK Dynamic Equity focuses towards the small- and mid-cap end of the market. However, unlike Ashworth-Lord, who focuses only on what he calls great businesses, the Jupiter fund’s manager Luke Kerr does not have a specific bias towards either growth or value.
Instead, he said the stocks he owns must possess at least one of the following three characteristics.
“One,” he began, “do we think it is going to beat market forecasts/is it going to deliver an upgrade?
“We spend a huge amount of our time analysing analyst forecasts to work out whether a stock is going to meet, beat or fall short of consensus expectations.
“The second thing we're looking for is whether a stock can grow sustainably faster than the market.
“If a stock is consistently growing its earnings faster than the market, it is likely to outperform over time.”
The third characteristic he looks for is a stock that can re-rate relative to the market, which he described as a “classic value sort of measure”.
“The first one is, if you will, a momentum measure, the second one is a growth measure and the third one is a value measure,” he continued.
“What you will often find in small and mid caps is that if you can identify a stock that has one of those attributes, it will probably have more. A stock that is consistently providing earnings upgrades is likely to be growing faster than the market and is likely to re-rate as well, because of those upgrades.”
One stock that meets all three criteria is Jubilee Metals. Kerr said there are two sides to the business: its first, in South Africa, recovers PGM metals (predominantly rhodium, palladium and platinum) from mining waste; the second, in Zambia, recovers copper and cobalt.
The manager said this method of extracting these commodities has numerous benefits, the first of which is “it’s a brilliant ESG play”.
“It’s taking toxic waste and cleaning it up – palladium is a particularly nasty metal,” he said.
“If you can take that out and put it into industrial use, the waste material gets a lot less toxic.
“It solves the problem for the mining companies that have these toxic dumps, as they are a big liability on their balance sheets and one day they will have to clean it all up, but these guys do it for free.
“It also means Jubilee gets its raw materials for free.”
He added: “This company gives us exposure to the underlying commodities. We're quite keen on the outlook for copper, for instance.
“But it’s hard for us to find mining companies that we’re comfortable with, because it's the smaller end of the market, they tend to operate one mine and it’s quite a high operational risk.
“It’s also a very nice ESG play, which is quite rare in the sector.”
Another characteristic that separates Jupiter UK Dynamic Equity from Buffettology – and most other funds in its sector – is its ability to short stocks and take its cash levels up to 40 per cent of assets.
However, these defensive attributes contributed little to its stellar performance over the past decade, even during the crash of last year.
“We didn’t have time [to take short positions] because the market fell so rapidly,” said Kerr.
“What we don't do with this fund is use the flexibility of its structure to fish for short-term moves.
“I'm not trying to catch market beta here. If I think it's a two- or three-month market correction, I won't try to change the structure and I won't increase the short book. The move last February was so quick: we factored in a full-blown recession in about two to three weeks. It was too quick to position the fund for that, so we didn't.”
The short book is still close to zero, which reflects Kerr’s optimistic outlook: he said the ongoing vaccine programme and the pending removal of coronavirus restrictions is creating the recipe for a powerful economic rebound which could surprise to the upside.
This would create the perfect conditions for a small-/mid-cap fund such as Jupiter UK Dynamic Equity to thrive. However, if it does maintain its successful run, Kerr is keen to point out it won’t be entirely down to him.
“You're talking to me as the headline name over the fund, but it is a team of 10 of us, and we all contribute to the funds that the team runs,” he said.
“I'm not out there researching every stock in this portfolio, we split the universe across the team.
“But we have a very strong record as a small- and mid-cap desk, so if the team is performing well, we would hope that this fund is at the forefront of that.”
Data from FE Analytics shows Jupiter UK Dynamic Equity has made 294.31 per cent over the past decade, compared with 144.55 per cent from its FTSE 250 ex ITs benchmark and 99.9 per cent from its IA UK All Companies sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £439m fund has ongoing charges of 1.08 per cent.