Top contrarian managers back ‘rock bottom’ Jupiter (2024)

Jupiter Fund Management is a share pick from our deep value Data Diveearlier this week.

Shares in Jupiter Fund Management (GB:JUP) have cratered over the past five years, delivering a negative total return of 69%. However, some of the world’s best portfolio managers are backing the British active asset manager.

‘Jupiter has had some headwinds,’ said Petter Langenskiöld, Elite contrarian manager of the Evli Hannibal fund, which holds Jupiter. ‘But the rock-bottom valuation metrics and the strong balance sheet compensate for this.’

The ‘headwinds’ boil down to Jupiter having a business focused on some of the most challenging parts of a shrinking market coupled with profits that are very sensitive to changes in its revenues.

As an active fund manager, Jupiter is losing out to passive fund providers that have become increasingly popular with investors, particularly in the areas it is exposed to: equities, which account for 61% of assets under management (AUM ); and retail and wholesale clients, 82% of AUM.

It also has a focus on UK markets, whichhavebeenstruggling for several years.

All this, and arguably more, is reflected in a valuation that is too low for top value investors to resist.

Langenskiöld is one of four Elite value investors backing the shares, all of whom are among the top c.3% of 10,000 equity managers monitored by Citywire. This smart-money backing resulted in Jupiter gaining an AAA Elite Companies rating last month.

How Citywire Elite Companies works.

Top three Elite backers

Sources: Citywire/Morningstar, latest holdings data.

The problem

There are grounds for contrarians like Langenskiöld to hope Jupiter’s chief executive Matt Beesley, appointed inOctober 2022, can turn the ship. Nevertheless, the challenges are also clear and can be seen in the three graphs below, starting with this one:

The ultimate source of any asset manager’s profits is the money it manages. While a rising stock market has helped prop up Jupiter’s AUM recently, net outflows of client cash have been a major drag since 2018 – the previous year saw a £5.5bn net inflow.

While annual net outflows have been moderating, news that manager Ben Whitmore will leave the group later this year is likely to have hurt.

His exit will follow those of managers Richard Watts and Nick Williamson, who left earlier this year, taking a chunky investment trust mandate with them. Meanwhile, two big-name stock pickers have retired: Richard Buxton last year and Dan Nickols this month.

Credible replacements have been recruited,but the first three months of 2024 saw a £1.6bn net outflow. That’s nearly three-quarters of the total net outflows for 2023, which experienced a second-half pickup.

The second graph (above) shows how downward pressure on management fees as a percentage of AUM has added to the pain from outflows.

This is a reflection of tough industry conditions. More positively, though, it also reflects increased institutional business. Institutional clients drive a harder bargain on fees than retail customers but are a source of higher quality, ‘sticky’ revenue.

The final graph (above) illustrates why falteringrevenues are particularly painful for asset managers. Many of the costs associated with running funds are fixed. The industry is also facing upward pressure on operating costs due to regulation and inflation. That means cost to income is heading up, which is squeezing margins and sending underlying earnings down.

The plan

Join the Elite! Get the weekly Citywire Elite Companies newsletter.

Beesley’s plan to improve performance goes to the heart of these issues.

The top priority is to boost revenue. The only way to do that when fees to AUMis falling is to increase scale.

Specifically, Jupiter is focused on winning business from institutions, which at the end of last year made up 18%, or £10bn, of AUM. Institutional net inflows were £3.8bn over the two years to the end of 2023, but the first three months of 2024 saw a £800m outflow, mainly due to Whitmore’s announced departure. Jupiter is also attempting to win more overseas customers, which account for 34% AUM.

Allied to this effort are attempts to get closer to clients and offer more bespoke services to both retain and win business.

The company is also doing what it can to support margins by cutting operating costs, which were down 12% last year, mitigating some of the upward march in cost to income.

Closing subscale funds has reduced the total number by a quarter. Meanwhile, more administrative tasks are being automated and processes are being simplified. Average staff numbers fell from 572 in 2022 to 527 in 2023 and finished the year at 512.

Will it work?

The savage derating of Jupiter’s shares suggests many investors feel it’s fighting a losing battle. Brokers are also not forecasting a recovery.

With the shares close to as cheap as they have ever been on several measures, smart money is betting the market is too pesimistic. Langenskiöld points to a forecast price-to-book value of just 0.5. Meanwhile, the shares tradeat 8.6 times forecast earnings and just 0.2 times sales.

Jupiter also has a solid balance sheet that gives reassurance to its shrewd backers and a forecast dividend yield of 5.8%. Essentially, the valuation is low enough that not much needs to go right to prompt a significant share price reaction.

Takeover is a possibility. However,speculation has been rife for some time, and Jupiter’s own £76m goodwill impairment last year for its 2007 Knightsbridge Asset Management and 2020 Merian acquisitions points to the perils for buyers of active managers.

As asset managers tend to be ‘geared’ plays on the markets they invest in, the most obvious good news Jupiter’s shareholders could hope for would be a resurgence in the UK equity market. There have been some tentative signs that could be happening.

Read more:

The company itself has pointed to the possibility that falling interest rates mayreignite retail investors’ animal spirits.

Severalof the world’s best portfolio managers have their fingers crossed it catches some kind of break.

Source: FactSet, as of 6 Jun 2024. EPS = earnings per share. Ebitda = earnings before interest, tax, depreciation and amortisation. Forecasts based on next 12 months.