The co-managers, who took over responsibility for the Fund in July 2010 from the retiring Tony Nutt, have forged a close working relationship with Rhys supplying the bond expertise and Alastair bringing his years of experience working in equities.
“We meet companies together and look at them from a bottom up perspective to decide whether we’re interested from an equity or bond perspective,” explains Alastair. “In some cases we’ll own both – or we’ll play the debt and equity at different points in time.”
This integrated approach has worked extremely well for the Fund, which aims to provide a sustainable level of income and the prospect of capital growth over the long term. This is done by investing in an actively balanced portfolio of fixed interest securities and mainly UK equities.
The Fund, which was launched back in 2002, is seen as a potentially good vehicle for conservative investors that have held assets in cash or bonds but are now looking for a gentle way in which to access equities.
“A lot of people don’t feel optimistic about the outlook so this fund could provide a way for them to move slightly up the risk curve by introducing a bit of equity exposure,” explains Alastair.
As well as delivering a monthly income, the managers aim to retain a level of liquidity and flexibility within the Fund. The fact it has low fees* and a strong performance track record are seen as other benefits to potential investors.
The portfolio is broadly split 70 per cent – 30 per cent in favour of bonds, with Alastair exploiting equity valuation anomalies and focusing on companies that can grow steadily due to strong balance sheets, healthy cash flows and barriers to competition.
Rhys, meanwhile, looks for higher quality, primarily investment grade bonds of well-managed companies that he feels are reasonably valued for the yield on offer.
He may also have exposure to government bonds. An illustration of how well the integrated approach works can be found in their approach to an investment in Spirit, the pub company.
“In late 2011 I was buying the bonds because management were taking steps to improve credit quality, mainly by paying down debt” explains Rhys. “However, as deleveraging progressed, management became more focused on generating shareholder returns, so by the middle of 2012 it started to look interesting from an equity perspective.”
As Rhys began taking some profits – ahead of exiting the position by early 2013 - Alastair started buying the equity. “Since the first quarter of this year the bonds have done very little and the equity has continued to re-rate,” he notes.
Since taking the reins the co-managers have generated a significant proportion of their returns through exposure to telecoms – especially BT and Vodafone – as well as UK consumer oriented names such as William Hill, Next and Cineworld.
On the bonds side an exposure to general insurance has been useful. However, the very low allocation to banks has not been helpful over the past 12 months, even though it played its part in a positive way during more volatile periods.
As far as current positioning is concerned, the co-managers have recently pushed the government bond weighting up to 23 per cent of funds under management. Principally this has been achieved through higher exposure to Australian government bonds.
“From an absolute value point of view they look attractive against the backdrop of an expectation that growth in Australia will surprise to the downside,” explains Rhys. “We believe it may also offer some protection for the Fund – particularly on any issues surrounding China.”
The Australian economy, he points out, is very closely aligned to the fortunes of China, with the risks being the end of the mining capex boom. “This contributed two thirds of growth to its GDP in 2012 but this year we expect it will be zero with the risks to the downside,” he adds.
However, the fact the Fund is nearing its maximum allocation to equities (35%) perhaps says all you need to know about where the managers are expecting the best risk adjusted returns to be found. “We continue to favour large companies that offer good value,” adds Alastair.
The UK, in particular, offers plenty of opportunities with the advertising industry looking very attractive.
“In a world where people have to compete for consumers’ cash more the importance of advertising is very high,” he continues. “We saw a real dip through 2012, but 2013 is proving to be a much better year and we’ve been playing this through WPP and ITV.”
Regardless of what the future holds, however, the Fund’s managers have every faith in the sustainability of their combined approach.
“It’s a reasonable size fund and so allows us to be agile in the markets,” he says. “We have real confidence that our integrated philosophy adds value and believe an actively managed – rather than passive – fund is where you want to be.”
*Low fees: 11/36 lowest fees in its sector: IMA Mixed Investment 0-35% Shares
CV
Alastair Gunn
Fund Manager, UK Equities Team
Alastair Gunn joined Jupiter in 2007 as an analyst for the UK Equities Team. He is currently manager of the Jupiter High Income Fund and co-manager of the Jupiter Distribution Fund.
Before joining Jupiter, Alastair was Managing Director of equity research for Bear Stearns International, prior to moving on to become a director of equity research at Arbuthnot Securities in 2003. Alastair is a registered representative of the London Stock Exchange.
Rhys Petheram
Fund Manager, Fixed Interest Team
Rhys joined Jupiter in 2006 and is manager of the Jupiter Corporate Bond Fund, co-manager of the Jupiter Distribution Fund and manages the fixed interest portion of the Jupiter Global Managed Fund.
Prior to joining Jupiter, Rhys was an Analyst at Towers Perrin Australia and a Credit Analyst for Utilities at Moody’s Investor Services. Rhys gained a degree in Commerce (Finance) and a Diploma in Modern Languages (Indonesian), both from the University of Melbourne. Rhys is also a CFA charterholder.
The above commentary represents the views of the Fund Managers at the time of preparation and may be subject to change and this is particularly likely during periods of rapidly changing market circumstances.
Their views are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Past performance is no guide to the future. The value of investments can fall as well as rise and your clients may get back less than originally invested.
Bonds are designed to provide different investment outcomes to cash deposits and do not offer the same level of security to your capital. The managers have the power to invest up to 10% of the portfolio in high-yield bonds (a type of bond which has a low rating or no rating from a credit rating agency) and non-rated bonds. While such bonds may offer a higher income, the interest paid on them and their capital value is at greater risk, particularly during periods of changing market conditions.
The level of monthly income may fluctuate due to the overall structure of the portfolio. This Fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Key Investor Information Document (KIID) is available from Jupiter. This information is intended for investment professionals only and not for the use or benefit of retail investors.
