The Long and Short of it: Review of Markets May 2019

Callum Abbot, Portfolio Manager of the JPM UK Equity Plus Fund, an active extension strategy, gives his views on markets over the last month.

Jun 14, 2019
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I was best man at my oldest friend’s wedding in May. It was a beautiful day, in no small part due to the sun shining throughout. I was sweating. In part due to the heat but also at the prospect of making the best man speech. A dangerous balancing act between Dutch courage and not overegging the hooch was in play. The expectation that the speech should make people laugh is a fairly high hurdle for someone that spends his life looking at spreadsheets but fortunately the groom has a penchant for daft antics that gave me plenty of ammo. What I did think as I wrote, and re-wrote, the anecdotes is the importance of storytelling in making something engaging. Think of a funny anecdote and write down the detail. Say it out loud. It probably does not sound that funny. The scene needs to be set, the tone lightened and enthusiasm needs to be added. The experience certainly gave me food for thought as to how I should present in my professional life going forward. Although don’t worry… I won’t drink before my next pitch!

Equity markets had a pleasant run through 2019, but in May there was some turbulence. Trump’s China rhetoric ramped up and the Brexit tachometer went back to full revs. The UK market did sell off around 3% and some of the cyclical rally, I mentioned in the previous blog, marginally reversed.

As the (geo)political noise picked up, a learned colleague of mine turned to an ancient philosopher for support. Confucius. Who said “To know what you know and what you do not know, that is true knowledge”. That is to say we do not know how Brexit ends up and we cannot second guess Trump’s negotiation tactics so we must position our funds accordingly. We must balance the cyclical with the defensive, the domestic with the international and we keep a close eye on liquidity. We believe there are opportunities where fear has created price anomalies, but it would be foolish to think we can bet our clients’ money on outcomes that our unknowable.

Fortunately in our UK Equity Plus fund, the ability to short helps us to balance those macro risks. For example we can go long those domestic stocks where we see attractive fundamentals and offset this by shorting those where we have cause for concern giving the portfolio a zen like balance. See below.

The Long

Greggs. Who would have thought a value for money pie and pasty maker would be capable of one of the smartest bits of marketing innovation we’ve seen in the UK market in recent years. The vegan sausage roll. It caused a press storm when it was announced and has been rolling (apologies) off the shelves of Greggs shops ever since driving LFL sales +11% and leading the company to materially upgrade sales expectations for 2019. The stock which had already been up strongly through the year gained another 21% in the month!

We hold an overweight position in our UK Equity Plus Fund.

The Short

Royal Mail, facing structural growth headwinds is a challenge for any business, but having an unproductive business model and a cost base that is completely inflexible compounds the issues.  Royal Mail face all these problems making a turnaround difficult and leading to frequent disappointing trading (material downgrades at 3 of the last 4 trading updates). The stock fell 19% in May as the company delivered (apologies) another set of initiatives to affect a change of fortune and rebased the dividend down. 

We have been short since the end of January.


Callum Abbot is a portfolio manager for the JPM UK Equity Plus Fund and the JPM UK Equity Core Fund.

 

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All data sourced from Bloomberg as at 31 May 2019  

JPM UK Equity Plus Fund

Investment objective

To provide long-term capital growth through exposure to UK companies by direct investments in securities of such companies and through the use of Financial Derivative Instruments (derivatives).

Risk profile

The value of Equity and Equity-Linked Securities may fluctuate in response to the performance of individual companies and general market conditions. The Fund invests in securities of smaller companies which may be more difficult to sell, more volatile and tend to carry greater financial risk than securities of larger companies. The Fund can use sophisticated investment techniques that differ from those used in traditional Equity funds. There is no guarantee that the use of long and short positions will succeed in enhancing investment returns. The Fund may use Financial Derivative Instruments (derivatives) and/or forward transactions for investment purposes. The value of derivatives can be volatile. This is because a small movement in the value of the underlying asset can cause a large movement in the value of the derivative and therefore, investment in derivatives may result in losses in excess of the amount invested by the Fund. The possible loss from taking a Short Position on a security (using Financial Derivative Instruments) may be unlimited as there is no restriction on the price to which a security may rise. The Short Selling of investments may be subject to changes in regulations, which could adversely impact returns to investors. The single market in which the Fund primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Fund may be more volatile than more broadly diversified funds.  

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Callum Abbot

Portfolio Manager, JPM UK Equity Plus Fund , J.P. Morgan Asset Management

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