According to the manager, lower quality companies have bounced in the past six months, with funds exposed to these areas experiencing more of an uplift in performance that those that continue to hold sustainable, quality income stocks.
“It is not yield for yield’s sake, [the fund] is targeting companies that will have a safe, high and rising dividend,” he states, adding: “Since the turn in the market where tapering has given way to some evidence of an improvement in the eurozone economy, the real low quality end of the market has bounced very, very hard since then.
“So while I mitigated some of that move, I’ve certainly been caught out and it is the kind of environment where I would expect a fund focusing on quality would certainly suffer and that certainly has proved to be the case.”
The fund’s performance figure for five years demonstrates the difficulties in sticking with high quality companies with the ability to sustain dividend payments – Europe’s ongoing turmoil has seen company valuations fall to historic lows. But Mr Herbert is adamant that this style will come good as Europe picks itself up and puts itself back together again.
He says: “We focus on quality income so we are very pragmatic in terms of how much we want to pay for that quality. Broadly speaking, it’s a portfolio that will hold a nicely diversified selection of high quality income paying stocks, but above all what we focus on is dividend growth.”
Mr Herbert says the primary thing he targets is the quality of the underlying businesses. “Quality comes in lots of different shapes and forms of course, but what I look for are businesses that are sustainable, have sustainable business models that will generate cash over the long run.”
But he adds: “The point about those kinds of high quality businesses is they can be very expensive, so we have a very strict discipline when it comes to how much we are willing to pay for those kinds of businesses. At the moment slightly more than 50 per cent of the portfolio is what I would call quality.
“The rest of the portfolio we are much more pragmatic about. The other section can be a lot more cyclical, it can come from industries where the dynamics are not quite as clear cut. The banking sector would be a classic example at the moment.”
The performance of the fund has lagged the benchmark MSCI Europe ex UK index in the longer term, returning 69.34 per cent for the five years to October 16, compared with the index return of 83.43 per cent, according to Morningstar data.
In the shorter term, the fund has performed more in line with the index with a three-year return of 22.19 per cent compared with the index return of 22.34 per cent, although the one-year figure of 22.24 per cent is slightly behind the MSCI Europe ex UK index return of 26.64 per cent as the manager points out the past year has been one of two halves.
He explains: “The period from Mario Draghi doing his comments mid-way through last year to May/June this year when the US Federal Reserve started talking about tapering of QE, was a period where the search for yield was very much spilling over in to equity markets.”
The manager points out that while there has been a significant shift towards peripheral Europe, with strong equity inflows into areas such as Spain and Italy, this geographical rotation and sector rotation away from more defensive areas has not necessarily been reflected in earnings growth.
“In Europe, there has been zero earnings growth for three years now and we’re just going into the Q3 reporting season and we’ve had a number of profit warnings. I’m halfway between the two camps of focusing on quality for the long term and having a more cyclical peripheral Europe bias in the portfolio, because there is a growing risk of disappointment. You have to be very mindful of over exuberance when it comes to that trade into peripheral Europe.”
EXPERT VIEW
Martin Bamford, managing director and chartered financial planner, Informed Choice,
Verdict
“Manager Gregory Herbert has only been in situ for six months. This is too short a timeframe to fairly judge his contribution to the performance of the fund, which has not been stellar over the past six months. The fund has a reasonably low yield and high ongoing charges of 1.81 per cent. It is hard to see what it brings to the party at the moment. That said, Jupiter has an excellent European fund managed by Alexander Darwall, which we currently recommend to our clients, so there is no doubt potential here. It will be interesting to see whether Mr Herbert can deliver over the next three to five years.”
