Jupiter Fund Management is trying to march into the wind. A bias towards UK equity strategies, which have been spurned by investors, has hindered efforts to plug the stream of cash running out of the doors of the investment house.
The departure of Richard Buxton, the veteran stockpicker, which was announced last week, was the latest shake-up at the fund management group. Over the past five years, fund flows have been out in the black in only two quarters. In the first three months of this year, net outflows came to about £900 million, after a brief recovery of £700 million of net inflows in the wake of the mini-budget in the final quarter of 2022.
It’s little surprise that investors’ expectations have diminished. At just over nine times forward earnings, the shares trade at a discount to a ten-year average of thirteen, which is also lower than rivals like Schroders, whose weighting towards less fickle institutional funds has helped to retain funds in stormy markets.
For Jupiter, asset management on behalf of retail investors, more flighty in times of stress, accounts for 86 per cent of the total under its stable. Attracting more institutional clients is one area being targeted by Matthew Beesley, the boss appointed in October last year, to help to engineer a turnaround. A weaker margin might be the trade-off, with net inflows of £1 billion from institutional investors one reason for the decline in the average net management fee margin to 73.5 basis points last year, from 76 basis points in 2021.
Another focus is attracting more funds from overseas. “Ex-UK markets” account for 94 per cent of the capital up for grabs in the market, but only a third of Jupiter’s assets under management. Addressing a middling performance will be necessary if it is to persuade more investors to place their cash with it. Over the past five years, only just under half of its funds were in the top half of their respective peer groups in terms of performance. On a three-year basis, that rises to only 54 per cent of funds by number and 49 per cent over 12 months.
Why does that matter so much? The FTSE 250 group epitomises the struggles faced by active managers against the rise of cheaper passive strategies. In a tougher environment, Jupiter has been dealt the bloodiest nose. Over the past decade, it has underperformed all its London-listed peers by delivering a 74 per cent loss for shareholders.
Some of Jupiter’s challenges have been more idiosyncratic in nature. It has faced scrutiny of the fees earned from Chrysalis, a London-listed investment trust focused on private companies, which it agreed to cut in December. In 2019, the defection of Alexander Darwall, a star fund manager, contributed towards clients pulling a net £4.5 billion in funds.
Beesley has sought to streamline costs, including shuttering a quarter of its funds and reducing headcount by 15 per cent. Expenses were about £30 million lower last year, largely thanks to a fall in variable pay costs. Cost-cutting will only go so far. Jupiter’s cost-to-income ratio rose to 69 per cent last year, up from 61 per cent in 2021. The 68 per cent decline in pre-tax profits last year outpaced a 15 per cent fall in revenue.
Launching more thematic funds is one of Beesley’s hopes to improve income, a nod to the stance of the £390 million acquisition of Merian in 2020. But, as the £304 million in cash pulled from ESG funds last month shows, according to data from Calastone, managing funds on that basis rather than by geographical focus is no surefire way to lure assets.
A dividend yield north of 7 per cent might look appealing, but there are similarly attractive income prospects on offer that don’t carry the same risk.
ADVICE Avoid
WHY Sluggish organic growth could continue to prevent profits, and the shares, recovering
Chemring
For investors in Chemring, any fears that orders delayed by the government budget stalemate in the United States would fail to materialise should be allayed. True, the prevarication over agreeing spending plans hit revenue over the first six months of the year, but the defence specialist’s order book now stands at the highest level in more than a decade, at £750 million, more than 50 per cent higher than at the same point last year.
Roughly £232 million of that sum will be worked through during the second half of the year, covering 90 per cent of the sum anticipated to meet annual revenue expectations for this year, which analysts at Berenberg put at £470 million, up from £443 million last year. Higher sales potential makes the discount embedded in the shares, which trade below the five-year average at 15 times forward earnings, less justified.
The war in Ukraine has increased demand for the rocket and missile defence and cybersecurity products that the FTSE 250 group makes. So, too, has a focus by the Biden administration on the perceived threat from China and strengthening military alliances across the Asia-Pacific region. It comes after a decade-long contraction in the supply chain capacity for making propellant material for rocket and missile systems. Moreover, increased orders aren’t being derived solely from increased government defence budgets but also by space launch programmes, with Chemring’s customers ranging from Nasa to Elon Musk’s SpaceX.
With that in mind, a fresh £90 million spending plan is set to upgrade the group’s manufacturing facilities over the next three years, which analysts at Jefferies think could allow the business to fulfil about 20 per cent more sales. A goal to increase annual revenue at its cybersecurity business has also been upgraded.
As far as funding its growth goes, Chemring has plenty of room. Net debt stood at £25 million, or 0.3 times adjusted earnings at the end of April, which explains a 21 per cent boost in the interim dividend to 2.3p a share. Next on the to-do list could be bolt-on deals.
ADVICE Buy
WHY Constrained supply and heightened demand could feed through to faster sales growth than anticipated
