Method in her mid-cap madness

JP Morgan Mid Cap manager Georgina Brittain’s key decision to hang on to high-performing stocks when other managers might have taken the profits has been spectacularly vindicated


There are reasons why I would make a dreadful fund manager. As soon as something made a decent gain I’d be itching to sell it and bank the money. Not Georgina Brittain, manager of JP Morgan Mid Cap investment trust. She has run her winners. And how.

The share price of the £210m fund is up 77 per cent over the past year, and its net asset value is ahead 65 per cent. It is top decile in its sector over both one and three years. Typically at this stage in the cycle a fund manager says those sort of returns can’t be repeated. Yet the ebullient Brittain reckons there’s still a lot of life in the sector yet.

Her two biggest holdings are Ashtead Group and easyJet, both wonder stocks of the past year. Ashtead was 100p in August 2011, now it is 708p. EasyJet was 338p in September 2011, now it is 1,373p. Together they make up 8.5 per cent of the portfolio but Brittain is not selling out. The crucial metric with Ashstead, she says, is to look at its ev/ebitda. When she bought into the stock, it was just over 6. Today it is about 7, which obviously is higher but means that for her it’s still not too pricey.

Crucially, Brittain asked the board to give her more flexibility when she took over the management of the fund in March 2012. She wanted to be allowed to hold on to her mid-cap winners even if they zoomed into the FTSE 100. EasyJet has done so, but Brittain remains a big holder.

Her other crucial decision back in March 2012 was to dump the fund’s mining stocks. “The general backdrop was looking pretty ugly, with commodity prices falling and China wobbling. There was also a lot of capex and overspending, and I just couldn’t find merit in any of them.”

But if this sounds as if Brittain is a top-down, sector driven fund manager it couldn’t be further from the truth. With a background in small-cap management, her focus has always been on company fundamentals.

“It is very much a bottom-up process, using a multifactor model looking at valuations, metrics, the quality of the stock and so on. But we don’t buy just because the process says so. We do a vast amount of fundamental research ourselves. We meet the management of companies, but only when we have a specific reason to do so. We don’t see them just because they are doing the rounds after the annual results.”

There are 70 stocks in the trust, and Brittain makes no bones about the fact it is a very growth-orientated portfolio. “Currently we have a very strong growth bias. The portfolio is slightly more expensive than the index, but is growing much faster. It is a high-conviction fund and I am a high-conviction fund manager.” Gearing is about 13 per cent, and at an incredibly low interest rate, after the trust exited an expensive debenture.

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On taking up the reins, Brittain also asked to be able to delve down into Aim stocks, which the board approved, although only on stocks with a market cap above £400m.

There is some “insurance” further down the portfolio with some steadier, less growth-orientated stocks, but that’s about all. But, interestingly, this portfolio is also yielding 2.5 per cent, a remarkable level given the 77 per cent price gain over the past year. “There is a significant yield on the fund, which I suppose tells you we are not completely gung-ho,” she says.

Apart from easyJet and Ashstead, it is the housebuilders that have really built the returns on this fund. Barratts and Taylor Wimpey are among its top 10 holdings, and further down it also holds Persimmon, Berkeley and Crest Nicholson.

“We liked them before the Budget, but we like them very much more after. The Budget was extremely helpful,” says Brittain, referring to measures such as Help to Buy, which is effectively getting taxpayers to underwrite mortgages.

Travel and leisure has also been a big winner for Brittain (it’s difficult to find stocks in this portfolio that have actually done badly). She holds both Tui and Thomas Cook.

Thomas Cook, she admits, was a racy decision, although the reasons for holding it were the same as for Tui. She just did not feel the market was correct in writing off the packaged holiday market as a busted business model. She bought Thomas Cook in her small cap funds, and when it became eligible for this fund, bought some more. It is now her sixth-biggest holding.

But after such stellar performance across the board, aren’t investors likely to rotate out? Is mid-cap now too pricey? No, insists Brittain. Mid-caps are now trading on about 13 times earnings, which is higher than 2009, of course, but she says is not expensive compared with history. “It is not cheap, but it certainly has been a lot higher than that in the past,” she says.

“I’m still very bullish. I can see the amount of cash that companies are throwing off. Of course it’s good that we are seeing much healthier news about the broader economic situation in the UK. But these companies would do well even without that.”

Oddly, the discount on this fund is a high 12 per cent, even though the stocks Brittain holds are mostly very liquid. “It’s totally wrong,” she says. And probably a very good reason to buy.