Holly Cook: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" Joining me today is John Baker. He is co-manager of the JPMorgan UK Dynamic fund.
John, thanks for joining me.
John Baker: Thank you, Holly.
Cook: So, in managing the fund the management team actually sits under JPMorgan's broader Behavioral Finance team which is interesting and I wondered if you can tell me how does that actually impacts the process that you apply when choosing stocks for the fund.
Baker: Sure. The behavioral finance process or belief in behavioral finance investing underpins our entire investment philosophy which is to look for cheap stocks with good news flow and that are good quality; by good quality we mean strong balance sheets, et cetera. Where behavioral finance comes into it is that we believe that there are particular personal idiosyncrasies which repeat over time that allow and create opportunities for us to invest in stocks that are going to generate alpha for our portfolios.
So, for instance, when analysts are assessing the future prospects of companies, they tend to underestimate the strength of the direction of travel in earnings estimates. They want to be cautious; they don't want to put their head above the power because of course there is a risk if you do so. You move too far away from the crowd and it's that that causes a persistency of earnings upgrades over time because analysts have underestimated.
Cook: So, if we look at where you've actually got the portfolio placed at the moment, I see you've got around a third of assets are in sort of the mega caps, a third in large caps and the remaining third split between mid and small caps. Is that deliberate or does it reflect sort of where you're seeing opportunity?
Baker: It's not deliberate in itself. We're not making specific size decisions. The portfolio is very much built from the bottom-up. So, it's really just a reflection of where we're finding investment opportunities at the moment.
Cook: And then if we look at where the assets are split by sector as well, I think the sector that has the greatest numbers of assets would be consumer cyclical. Is that related to the story of the strength of the UK consumer?
Baker: The underlying driver of the profitability of those companies is driven by the strength of the UK consumer and of course, we've seen unemployment figures recently that have come out very strong, 5.3% unemployment, that's the lowest it's been in seven years and importantly as well, we're seeing wage growth coming through in excess of 2%. And when you also assess that inflation is running at less than 0%, you're seeing a very strong rise in real wages. So, therefore, sectors such as housebuilders and retailers, airline stocks are performing very strongly as a reflection of the consumer strength.
Cook: John, thanks for coming in and sharing with us insights into your fund process.
Baker: Thank you very much, Holly.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
