JP Morgan’s Georgina Brittain: Brexit risk will lead to volatility and bargains

JP Morgan’s Georgina Brittain tells Tom Bailey how she has reacted to the coronavirus crisis, and why Brexit is a risk that could lead to huge volatility for the UK market.

Georgina Brittain describes herself as first and foremost a “bottom-up stockpicker”. She is the manager of various funds, including JPMorgan UK Smaller Companies fund and the JPMorgan Mid Cap and Smaller Companies investment trusts. A barrister by training, her career with the firm began almost exactly 25 years ago when she joined Flemings, which through a series of mergers and acquisitions eventually became JP Morgan Chase.

As she makes clear, Brittain does not play themes or macroeconomic approaches in the funds she manages, instead focusing on the fundamentals of companies. “This is a stock-by-stock approach to investing. It is not going to change.”

So what happens in the face of a global pandemic, arguably the biggest macroeconomic event of most people’s lives? How does a fund manager who scorns attempts to anticipate or react to big-picture developments respond to a widespread shutdown of the global economy?

Over her 25-year-long career, Brittain has seen several big market panics and sell-offs, including the early 2000s tech bubble and the 2008 global financial crisis. For a bottom-up manager, the most important thing, she says, is to always keep focused on the numbers, particularly the balance sheets of the companies in your portfolio. Investors in a time of crisis should be revisiting these balance sheets and stress-testing them.

“The absolutely crucial thing at the moment is the state of the balance sheets,” she says. “Some companies will be doing fine, thank you, and some may even be able to keep paying their dividends.”

The role of the fund manager in this, Brittain says, “is to stand back and look at the companies we’re putting capital in, and try to determine which ones will come out stronger”. One company she owns that she expects to hold up well is Games Workshop. Although it has had to close its stores, she believes it is a robust business, not least because of the strength of its intellectual property.

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Not the same as 2008

Brittain points out that this focus on balance sheets was also important during the global financial crisis. However, this time around it will be different due to the nature of the crisis, she argues. “The crucial difference is that 2008 was a financial crisis and therefore the problem companies faced was primarily financial.”

Principally, there was a lack of cash as banks were unable and unwilling to lend to companies. “By around February to March 2009, it was recognised that we would recapitalise these companies. From the stock market’s point of view, the crisis was over. It was that simple,” she says.

The crisis now will not be so easy to resolve. “The issue is about balance sheets again, but it is much less cut and dried.” This time around, it is not a credit crunch putting balance sheets under pressure; “there is much more going on”.

She explains: “We have to try and work out which companies will lose market share, and whose balance sheets will be strong enough if this virus goes on longer. No crisis is ever the same, and there are a lot of lessons to be learnt this time.”

Don’t panic, find bargains

What is not different, however, is the uselessness of panic in a crisis. Instead of panicking, “you have to look the situation in the face”, she says.

As is always the case with a market crisis, big sell-offs mean there are bargains to be had. “This is a life-changing event – and we’ve both bought and sold, as you would expect.”

Brittain says that the fact that her investment trusts are currently geared is a good indicator that she is bullish about the opportunities currently available.

Some of the buys have been businesses previously on her radar. “We have bought some companies that we had been eyeing up before, where we had decided that their valuations were too rich. Some names have come back into more sensible territory.” She gives the examples of Pets at Home and Kinetic.

Brexit around the corner

However, even before the virus, a great deal of uncertainty was hanging over the UK economy. The UK is still due to formalise its departure from the European Union by the end of the year. Previous Brexit fears have weighed heavily on small and mid-cap stocks. Should investors be worried about further declines as the Brexit risks reappear?

“Brexit is the question no one is talking about,” comments Brittain. “But UK mid and smaller companies have been in the eye of the Brexit storm since January 2016, even before the vote happened.”

She says it is not a risk she has taken her eye off: “We started looking at Brexit three or six months prior to the vote, and about four years of my investing career has been focused on Brexit – and it still is. We are still incredibly mindful of the Brexit risk.”

Brittain suggests investors should look at the strong performance of the market in December and January, after the victory of Boris Johnson in the UK general election. “We know what happened to the markets in December and January, prior to Covid-19. Small and mid caps were the areas that came back into focus and saw lots of inflows. I don’t think that’s changed.”

She adds: “Every now and then Brexit creates huge volatility in the market. But we’ve done our work and prepared ourselves. We know where our [target] companies are, so we can use that volatility as a buying opportunity.”

Acorns to oaks

Away from Covid-19 and trade deals, Brittain describes her approach to stockpicking as being about finding stand-out companies, based on three criteria: quality, momentum and value. “In a nutshell, we are about finding the right stocks and drilling down into why they are different.”

Quality refers to the strength of a company’s balance sheet, as previously mentioned. In terms of momentum, she seeks those firms that are consistently growing their earnings as well as beating analyst estimates. Finally, the stock must be reasonably priced.

However, alongside earnings momentum she also hopes to identify companies that are showing momentum in their overall growth, evolving from small businesses to large ones.

In this context she notes that some of the companies she originally bought in her small-cap funds are now in the FTSE 100, for example JD Sports. Bought many years ago on a market capitalisation of £200 million, it is now worth over £5 billion. Because of size, it was sold nine months ago.

“With small and mid-cap investing you get the beauty of seeing companies going from acorns to oaks,” she says.

Georgina Brittain in six

1. Best investments: JD Sports and Ashtead.

2. Worst investment and lesson learned: The People’s Operator – a small-cap ethical mobile operator, where Jimmy Wales, the founder of Wikipedia, was chairman. It totally failed to live up to the hype. We exited well before it went into administration. I learnt never to back a story in small caps, only follow the numbers.

3. Alternative career: A barrister (I was one for a time).

4. In my spare time, I like to... Horseride. I also very recently bred a foal!

5. The one thing I would like to see change in financial services is:  I would like to see a lot more women.

6. Do you invest in the funds? Yes, absolutely!

Interview and words by Tom Bailey.