The recent consolidation among fund managers may be well timed. Henderson Group has disappeared from the London market, having bought Janus Capital and switched its listing to New York. Aberdeen Asset Management has merged with Standard Life to become the imaginatively entitled Standard Life Aberdeen.
There are a number of drivers for these changes. Last year, with the Brexit shock, was not a good one for active managers. Margins are in decline as a consequence of the shift towards passive management and a perception that fund managers have had it too good for too long. The Aberdeen-Standard Life deal was largely driven by the former’s high exposure to emerging markets, which had had an awful couple of years but are now recovering sharply.
Looming over all of this is Mifid II, which comes in at the start of next year and will have implications for the fund management industry that are hard to quantify but which will probably be negative. In particular, managers will have to decide whether to fund research themselves or pass the cost on to their clients.
Most, including Jupiter Fund Management and its rival Schroders, have gone for the first option — Jupiter has quantified the annual cost at £5 million. The change should play to the strengths of the larger firms, including Jupiter. We simply don’t know, however.
The possibility that Jupiter may eventually be bought by a larger competitor is one of the reasons for holding the shares, along with a 5.4 per cent dividend yield and the assumption that payments will continue to rise. The halfway payment was up by 51 per cent, and Jupiter has indicated that it held surplus cash of about £90 million at the end of June, over and above that required for regulatory reasons.
The fund manager has indicated that it needs to set aside about 10 per cent of earnings for investment and growth and the rest will be returned to investors, with special dividends the preferred route. The shares have performed strongly, up almost 30 per cent since the start of the year, but even at the current level, up 4½p at 558p, they remain a solid income stock. That rise was on the back of third-quarter figures that showed strong growth in assets under management with not too much help from market and foreign exchange movements. The last chipped in only£181 million, against a £1.245 billion net influx of fresh funds spread across all asset classes but with a significant amount going into fixed income, a reflection of expectations of a rise in interest rates.
Jupiter has been expanding this side, a timely looking strategy, with one emerging markets corporate bond fund launched in March and another emerging markets fund last month. The weak spot was in funds of funds, hit by underperformance and more competition elsewhere.
The outlook statement is positive enough. Jupiter is regarded as well managed with further to go in terms of diversification, both geographically and by asset type and by adding on new clients. Despite concerns over Mifid II the fund manager is well placed for further growth given its strong retail distribution base and the move towards self-investment of pensions.
As ever with such businesses, the danger is of an abrupt reversal in the markets, which would have retail investors heading towards the exits. The last quarter of net outflows was at the end of 2016, but the growth in assets under management could reverse very quickly in that case.
The shares sell on about 16 times this year’s earnings. That is not expensive for the sector but it does suggest further upside is limited.
My advice Hold
Why Jupiter is still a good dividend stock and the rating compares well with others in the sector but shares have come up a long way now
Mondi
The market’s reaction to the warning from Mondi about the impact on the packaging specialist of higher costs and unfavourable exchange rate movements looks like a classic case of finding a reason to take profits. None of the negatives were exactly unknown, indeed the company has been pointing to them for some time now. The shares, though, have risen from well below £4 in January and were in danger of running out of steam.
Mondi says underlying operating profits for the third quarter were 8 per cent higher, at €245 million, than in the corresponding period last year. The estimated impact of planned shutdowns for maintenance at its various plants, always a factor in overall performance, in the fourth quarter will be about €20 million, down from €35 million a year ago.
All four parts of the business — packaging paper, fibre packaging, consumer packaging and uncoated fine paper — are performing well, though the latter is facing the usual seasonal downturn in the summer. Mondi is confident that the fourth quarter will be strong, supported by generally higher selling prices, another significant factor behind overall performance, and good growth.
All this is positive enough and would not seem to warrant a 163p fall in the share price to £19.26. The problem is that earlier consensus forecasts of underlying profits of €1.055 billion to €1.06 billion were plainly too high — “a mountain to climb” to reach them, as one analyst has it. Jefferies, the house broker, is now looking for €1.01 billion, a 4 per cent decline on its earlier forecast.
The negatives are higher prices for the wood, energy and chemicals that Mondi needs and the adverse currency movements. The company reports in euros so will be impacted by the lower dollar, while its operations in Russia and Turkey will be affected by a weakness in these countries’ currencies.
All this should have been known to the market. At their current level the shares sell on 15 times earnings, which looks like a good entry point given that the other house broker, UBS, is forecasting the arrival of the long-awaited special dividend early next year.
My advice Buy
Why Share price reaction looks overdone
