Fingers crossed
With all of the duo’s analysis, it is still almost impossible to know which of the companies they choose will end up doing well.
“If we are lucky we will be getting 60% right, 40% wrong. We want to construct the portfolio with that in mind and aim for a range of investments because we don’t know which camp it will end up in.
“The evidence shows that on the 60/40 split, our winners do a lot better than our losers,” he adds. “That obviously makes the portfolio return better than a simple 60/40. And we know by looking at the portfolio in the past 10, 15 years that the winning stocks have certain characteristics.
“They have bad price momentum at the time of purchase, sales and asset growth has been poor, profit variability is high and leverage is not too high.”
One stock the pair have been debating recently is Sports Direct.
“The numbers show that, notwithstanding all the other things that are going on, the company is quite conservatively run,” says Whitmore.
“Its depreciation policy is quite conservative and the balance sheet is very conservative. However, we have heard a lot in the past year about poor business practices. Also, it hasn’t had a finance director for three or four years.”
The managers have yet to reach a conclusion on Sports Direct but, says Whitmore, as with any business there are three major stakeholders: customers, employees and shareholders. And when any of those “get out of whack”, there is a problem.
“Dermot and I look at everything in the round, including the balance sheet, cashflow and, finally, the profit and loss account. Profit and loss is malleable and the primary focus of management.
“We have learnt two important lessons during the past 20 years. First, if a company doesn’t turn its profits into cash, there is something fundamentally wrong, and second, if the balance sheet can’t cope with an unanticipated shock, that is a problem.”
Biography
Ben Whitmore joined Jupiter in 2006 and is currently head of strategy, UK value. He manages the Jupiter UK Special Situations Fund and the Jupiter Income Trust, as well as co-managing the Global Equities Sicav, alongside Dermot Murphy. Before joining Jupiter, Whitmore worked at Schroders, managing both retail and institutional portfolios and around £2bn of assets.
