The upcoming retirement of Jupiter’s head of small and mid-cap equities, Dan Nickols (pictured), should mean “business as usual” for investors in his Jupiter UK Smaller Companies fund and the Rights and Issues investment trust, according to professional fund buyers. However, others warn against buying into the funds at this point, until there is “further clarity” on the future of Jupiter’s UK equity offering amid high levels of staff turnover.
Last Friday (10 May), it was announced that Nickols will be retiring from his fund manager responsibilities at the end of next month. He has managed the now-£428.2m Jupiter UK Small Companies fund since January 2004. Over this timeframe, the fund has returned 699.7%, compared to its Numis Smaller Companies ex IT benchmark’s gain of 472.6%. It has also outperformed its average peer in the IA UK Smaller Companies sector by 275.4 percentage points over the period, according to data from FE Fundinfo.
Meanwhile, the Rights and Issues investment trust (RIII), which he has co-managed alongside Matt Cable since October 2022 following Simon Knott’s departure, has returned 22.3% over this time compared to its average peer’s total return of 22.6%. The £141.6m investment company is currently trading on a 14.8% discount to its net asset value, according to AIC data.
In terms of how both the fund and the trust will be run following Nickols’ departure, co-manager of RIII Cable will become lead manager of both mandates, supported by Tim Service.
Before joining Jupiter as an investment manager in 2019, Cable spent 11 years as a member of the UK smaller companies team at M&G.
Fellow investment manager and head of the SMID team Service joined Jupiter in 2007, also as a member of the small and mid-cap UK equity team. He has also held roles at Merian Global Investors and JP Morgan Asset Management.
A spokeperson from Jupiter said the firm’s transition plan is “clear and seamless”, adding: “Jupiter typically runs funds on a team basis, with a co-manager structure – and one benefit of this is that retirements and departures can be managed effectively.”
Buy, hold or fold?
Darius McDermott, managing director of FundCalibre, told Portfolio Adviser: “For both Jupiter UK Smaller Companies and Rights and Issues Investment Trust PLC, Matt Cable’s promotion to lead manager ensures a smooth transition and preserves the strategies’ established investment approach. We therefore recommend investors hold.”
Dan Coatsworth, investment analyst at AJ Bell, agreed with McDermott, reasoning that Nickols’ retirement “shouldn’t change the way Jupiter’s small-cap funds are run” as asset managers are “well versed in succession planning”.
“Typically, a change in management won’t alter an established investment process and the fact Matt Cable is taking over as lead manager on the Rights & Issues investment trust means there is already consistency given that he was previously co-manager.”
Looking at RIII specifically, QuotedData co-founder James Carthew said: “While it is a shame to see the management line-up change so soon after the handover from longstanding manager Simon Knott, as far as the trust goes this should be business as usual.
“Matt Cable has worked alongside Dan since 2020 and we do not expect to see much, if any, change to the Rights and Issues portfolio as a result of this move.”
Does Jupiter have a ‘small-cap problem’?
While fund selectors are confident that the underlying process of the mandates will not change too drastically, others have voiced concerns regarding Jupiter’s small-cap capabilities.
Charles Younes, deputy CIO at FE Fundinfo, said that while Nickols has held a long-term place on the FE Alpha Manager list and boasts a “very impressive track record”, the team has “stayed away from the fund since the Merian/Jupiter merger”.
“The products mix didn’t feel right with a lot of overlap,” he explained. “We had our concerns around the merger between Merian and Jupiter, especially for the UK equity desk. We were also concerned this may distract the fund managers from their investment focus.”
Younes added there have been a number of changes to the UK equity line-up at Jupiter, with Ben Whitmore set to leave the firm in July to set up his own firm. JOHCM’s Alex Savvides will soon take the helm of Jupiter’s £2.1bn UK Special Situations fund, while former GAM fund manager Adrian Gosden took on the Jupiter Income Trust at the start of last month.
“I think we should expect further changes in the product line, with a lot of [Nickols’] former Merian colleagues having left Jupiter over the recent months. Like we did, we believe investors should stay away from the fund until there is more clarity from Jupiter on the future of their UK equity offering.”
Ben Yearsley, director and co-founder of Fairview Investing, added: “With Dan leaving and also the two chrysalis managers as well, it calls into question whether you want to be invested with Jupiter for smaller companies.
“I’ve always held Dan in the highest of regards and he was one of the premier small-cap managers.”
However, McDermott believes that there are “several reasons” for the “period of underwhelming numbers” from Jupiter’s small-cap funds since the Merian acquisition, where these strategies have underperformed.
“When interest rates began to normalise, these funds remained overweight in growth stocks which, as longer duration assets, generally derated as a period of higher rates was priced in. The performance drag was then compounded by some poor stock selection,” he explained.
“However, I would not say Jupiter has a small-cap problem, rather its investment style has been out-of-favour, made worse by some selection missteps. While we don’t currently hold any of the funds in the UK smaller companies range, we have awarded the Jupiter European Smaller Companies fund an Elite Rader rating.”
In terms of RIII, Carthew added that all small-cap trusts are out of favour as most UK small-cap strategies have struggled “in the face of significant outflows” in this area.
“Nevertheless, against its peers and benchmark indices, Rights and Issues’ NAV returns look reasonable over the past 12 months. We don’t see the need to jump ship.”
While UK small caps have been in the doldrums over recent years, their performance is starting to pick back up, with the Numis Smaller Companies index up 5.9% year to date, and up 5.1% over the last month alone.
“What’s interesting is the timing of Nickols’ retirement as the announcement has been made just as market interest towards small caps has started to improve,” Coatsworth said. “Many share prices in this part of the market are beginning to trend higher and that is also evidenced by Jupiter UK Smaller Companies fund and Rights & Issues having been in a rising price trend since last October.
“Nickols is leaving as the great small-cap recovery gathers pace, which will help to preserve his legacy and means he isn’t departing at the bottom.”
Fund alternatives
Adam Carruthers, senior fund analyst at Charles Stanley Direct, said his team will make a decision as to whether to buy, hold or sell the fund after meeting with Tim Service and Matt Cable “in due course”.
A potential alternative for investors to consider, however, would be Gresham House UK Smaller Companies.
“Gresham House has a very well-resourced team to facilitate deep due diligence on new opportunities and support active engagement with management of investee companies,” he explained. “This provides input into strategic decisions and maximises shareholder return.
“[The team] applies a private equity perspective to public markets. The portfolio will typically be heavily weighted towards the software, healthcare and business services sectors.
FE Fundinfo’s Younes uses Gresham House’s Micro Cap strategy, as well as Liontrust UK Micro Cap, Tellworth UK Smaller Companies and R&M UK Smaller Companies – the latter of which, he said, is “closer to Dan Nickols’ investment style”.
Elsewhere, FundCalibre’s McDermott said a good alternative option for small-cap exposure is IFSL Marlborough UK Micro Cap Growth.
“Much like Jupiter, the strategy has gone through a period of poor performance due to its out-of-favour investment style. However, we remain confident that the experienced management team will recover when the wind changes.”
Like Younes, the managing director is also positive on TM Tellworth UK Smaller Companies, which is managed by UK-focused boutique Tellworth Investments.
“The investment philosophy of co-managers Paul Marriage and James Gerlis is rooted in meticulous research and an emphasis on engagement with company management, helping them uncover opportunities in some of the most under-researched corners of the market,” he said. “The fund’s transition to Premier Miton in June will only bolster its investment proposition.”
Simon Evan-Cook and Alex Paget, fund managers on the VT Downing Fox fund range, favour WS Whitman UK Small Cap Growth, which they describe as “something of a hidden gem” within the UK small-cap sector.
“Whitman is a UK specialist boutique (which is one big tick for us) and the fund itself is managed by Josh Northrup and Sean O’Flanagan, who are genuine bottom-up stock pickers (which is another),” they explain.
“With the benefit of hindsight, the fund was launched at a very inopportune time – December 2020 – so just before one of the largest bear markets in UK small caps on record, which is partly why the fund remains relatively small at around £20m. Like many growth-focused UK small-cap funds, it struggled over recent years as interest rates rose, everyone hated on ‘Old Blighty’, and UK plc was sold by the bucket load.”
The managers held WS Whitman UK Small Cap Growth over this time and pointed out its management team has “remained steadfast” in its view that the opportunity set among UK small caps is “incredibly attractive”.
“UK smaller companies have bounced back significantly this year, and the Whitman fund has taken full advantage. Its performance of late has been driven by stock selection, with the added kicker of three of their stocks being bid for (IQGeo Mattioli Woods and Lok’n Store) – further evidence of the very attractive valuations at the bottom end of the UK market.”
