The Jupiter UK Smaller Companies fund continues to run with “relatively elevated levels of cash” as manager Matt Cable prepares to support portfolio constituents that need to raise additional capital.
Cable said holdings in the £221m fund, which he inherited from James Zimmerman on 1 August 2019, had not been immune to the coronavirus-related lockdown of the UK economy, with 18% of its investee companies having shutdown operations completely and a further 25% in partial shutdown.
In addition, with focus from firms on protecting the health and safety of all stakeholders and ensuring they are well enough funded to survive the crisis, almost half (45%) of the fund's holdings that were expected to pay a dividend have decided not to. A further 28% have yet to decide on their dividend policy, with many expected to follow suit.
"While dividends are an import element of total return, I am very supportive of companies choosing to defend their balance sheets in this way given the extreme levels of uncertainty," Cable told investors.
"A number of companies have said that they will pay the cancelled dividends as specials at a later date if conditions allow."
Elsewhere, around 28% of its holdings saw a reduction in profit forecasts for the current year, with a further 40% withdrawing guidance on profits altogether or seeing forecasts withdrawn by analysts. Just 15% of companies have said they believe profits will be unaffected.
"It has been an exceptionally difficult period for investors in the UK small-cap universe, and the companies held in our portfolio are unfortunately no exception," Cable said.
Ready to support holdings
The ex-M&G analyst said his fund had held higher cash levels since mid-February, which he felt continues to be "the right approach". While only one holding - construction company Costain - had come to the market to raise additional capital so far, "I want to be ready in case others need support".
Cable's comments come in stark contrast to a letter sent to UK listed companies from Invesco's co-heads of UK equities Mark Barnett and Martin Walker, who warned they would not support follow-on issuance unless there was a "strong rationale" for it.
In Costain's case, the £100m fundraising, which was non-Covid-19 related, shocked the market, according to Cable. "This would have gone down badly at any point, but was especially unwelcome in the current environment.
"I believe they should ultimately be well positioned as the UK government increases infrastructure investment over the coming years, but clearly it is a disappointing situation."
Cable said the higher levels of liquidity came from the sales of his stakes in IT infrastructure provider Softcat and e-commerce brand Boohoo, "both of which performed well in the early stages of the sell-off and were outside the fund's market cap range".
He also sold low-cost airline Wizz Air and utility firm Smart Metering Systems on valuation grounds, and mobile payments provider Boku "after a very poor update undermined my confidence in the investment case".
The sole new addition to the fund, Cable continued, was pharmaceutical firm Shield Therapeutics.
Not worrying about short-term earnings
Cable said, however, he was not "spending a lot of time worrying about short term earnings". "While the market still seems fixated on these in many cases, I think they are even more unhelpful in valuing businesses than usual," he said.
"In my view, the opportunities will come in companies who see significant impact to short-term earnings but a) survive and b) return to ‘normal' (or better) once things settle down."
The manager explained that while current extreme levels of uncertainty make valuing companies "very difficult", his focus currently is on asking his holdings whether they can "survive a deep and prolonged downturn in activity", and if the crisis represents a long-term threat, or opportunity, to the business.
A further consideration at this stage, he said, would be what the likely level of profitability will be once the pandemic is under control. "In many cases, there should be little long-term impact, but it is right to question whether there will be fundamental changes in behaviour, for example in respect of travel, following the crisis."
Jupiter UK Smaller Companies had, as at 8 April, lost 31.8% of its value in the year-to-date, compared to losses of 26.8% and 30.1% for its Investment Association UK Smaller Companies sector peers and Numis Smaller Companies plus AIM ex ITs benchmark respectively, FE fundinfo data shows.