Asset allocation: Jupiter’s Gunn brushes aside China worries to focus on UK growth

The Chinese stockmarket crisis is not scaring Jupiter’s Alastair Gunn, who is focusing all his energy on the UK domestic market as he believes growth is set to continue in 2016.

Diversification in domestically-focused UK equities, including consumer and industrial names, is the driver behind his £510m Jupiter High Income fund, which he co-manages with Rhys Petheram.

Gunn is of the view that the UK economy will remain supported by high employment, lower oil and food prices, and a modest amount of real wage growth.

Despite the headwinds of the China crisis and geopolitical turmoil in Iran and Saudi Arabia, he says: “The UK will have another year of growth, despite being slower than 2015. Interest rates in the UK will go up sooner or later, we’ll be on top of inflation and growth will pick up, which is especially good for banks and the domestic economy overall.”

The fund has a high risk profile because of its large stock exposure of nearly 80 per cent, but it has paid off since Gunn took over the fund in 2013 as it has been outperforming the Morningstar Aggressive Allocation category.

Except for 2014, when the fund returned 2.9 per cent against the category’s 5.1 per cent, the fund returned 20.4 per cent in 2013 and 7.6 per cent in 2015 against the Aggressive Allocation category yearly returns of 14.8 per cent and 2.3 per cent for the same period.

The high income fund is invested 78.9 per cent in equities, with UK equities making around 70 per cent of the fund and the remaining allocated to international equities, mostly in Europe.

Gunn says:“Our equity positions are in firms we believe have the potential to deliver rising dividends, while our defensively-positioned bonds are in financially sound holdings.”

The fixed income portion of the fund, currently at 18.8 per cent and managed by Petheram, has a mixture of UK government bonds and corporate bonds, mostly in financials as a defensive position for the fund.

As part of his focus on diversification in equities, Gunn particularly likes retailers, airliners and some industrial names.

He holds Next, although it has an allocation of less than 1 per cent, having bought “into the weakness” of the stock following the retailer’s recent 5 per cent share price fall to £70 due to poor Christmas sales, blamed on the unusually warm weather.

Gunn says: “We are also building positions in N Brown, an online retailer, as well as Conviviality Retail, the UK’s largest franchised off-licence and convenience chain.”

He also recently added 0.4 per cent of the portfolio to Royal Mail, which is currently paying a 5 per cent dividend.

Gunn joined Jupiter’s UK equities desk in 2007. In July 2010 he was first appointed co-manager of the £294m Jupiter Distribution fund, which he still manages alongside bond manager Petheram.

Gunn then took over the Jupiter High Income fund from Anthony Nutt on 1 July 2013 after Nutt announced his retirement.

He says: “When I picked up the fund it had a very high concentration to pharmaceuticals and oil and although they are still an important part of the fund, I brought that position down quite a lot.”

Gunn says he slightly reduced the allocation to GlaxoSmithKline and AstraZeneca because “fundamentals were not good” for the two pharma firms. The two stocks currently make 2.6 per cent and 3.4 per cent of the fund respectively.

The fund manager adds he is worried about low dividends in sectors such as utilities and property, which he sees as having “very little growth potential”, with property in particular having a “very low yield”.

Gunn says where possible, he wants to reduce exposure to some of these areas in the fund in favour of increasing allocations to more international firms, such as Chicago-based pharmaceutical company AbbVie, which currently represents 1.3 per cent of the fund.

He says: “We are more willing to buy stocks where dividends are low but they can give capital back to shareholders.”

At the start of running the fund, Gunn was also sceptical about financials, especially in the UK banking sector, but in 2015 “we got to the point where the bank sector was doing better”. For this reason he kept HSBC among the top holdings, currently at 3.4 per cent of the fund.

The fund also has 2.8 per cent and 1.7 per cent allocations to Barclays and Lloyds respectively.

Gunn says: “HSBC looks very cheap at the moment. We are also getting clear messages from the Bank of England that we’ll see medium-term strong growth for 2016 in the country.”

Despite being positive on the UK and the fund’s performance, Gunn is not completely excluding the risk that the Chinese crisis might bring turmoil to the western world.

Gunn says: “Although I have very little exposure to emerging markets in the fund, China has the potential to devalue and drag the world into a deflationary spiral. In that scenario, being 80 per cent in equities is not good so we might reduce those holdings and increase cash.” The fund currently holds 2.3 per cent in cash.

However, looking at other risks for the UK market, Gunn brushes aside concerns about a potential Brexit.

He says: “I don’t think a Brexit is going to be a problem. Although it is difficult if the UK leaves the European Union, if that happens it won’t fundamentally change the performance of certain sectors in the country.”