The Analyst: By Jupiter! This is how to run a fund
Saturday 29 September 2007
I had not long been in the investment industry when the Jupiter Income Trust launched in 1987, but the equity income sector was a favourite of mine even then. In the 20 years since, the fund has had just four managers – and two of them are among the most exceptional I have ever met.
The Jupiter Income Trust came to prominence after William Littlewood took it over in December 1990. During his tenure, the performance was way above most other equity income funds, and indeed considerably better than most UK growth funds, too. However, at the end of December 1999, Mr Littlewood sadly had to step down due to ill health.
I remember meeting him that month, and he said that Vodafone, which at the time had a share price of around £3.50, was going to fall dramatically over the next two or three years. Of course, he was proved correct (two years later, its shares were at £1.80).
The departure of Mr Littlewood was clearly a great loss to Jupiter and it caused quite a commotion among financial advisers. Then, in April 2000, I was encouraged to see that Jupiter had chosen Tony Nutt as Mr Littlewood's replacement. Many other advisers took the opportunity to recommend that their clients sell Jupiter Income.
What was amazing was that Mr Nutt's performance running another fund for Jupiter had been almost as good in the previous few years as Mr Littlewood's. Not only that, but Mr Nutt had already experienced running large funds in the 1980s at Lloyds TSB.
Frankly, I thought at the time that advisers had lost their minds. I am pleased to say that Tony Nutt has since taken the fund on to further success.
The history of Jupiter Income is also interesting in that it shows exactly how an income fund should be managed. A client who bought the fund at launch would now be receiving a yield of over 16 per cent on their original capital. That capital would itself have grown by almost 450 per cent. No wonder equity income funds are so popular; they have the exact same objectives as most investors – an increasing income and capital growth. I would point out that of course the fund can go down as well as up, and that the yield is not guaranteed.
Mr Nutt is careful not to get sucked into holding stocks merely because they are a large part of the benchmark. He looks for shares that can deliver strong growth as these companies are better able to produce rising dividends. After all, there is no point in investing just for high yield if there is no growth in that income or capital. Mr Nutt looks carefully at the long-term drivers of a business, and in particular at the generation of free cash-flow. After all, cash is the lifeblood of any company and dividends cannot be paid unless a company has plenty of it.
The fund will typically have between 70 and 130 stocks, the actual number depending on how bullish Mr Nutt feels. He is happy to take large positions in individual stocks, but will often start with a much smaller one and increase it as his confidence in the company grows.
Like many income fund managers, Mr Nutt has been moving up the capitalisation scale. His largest holdings are BP (6.3 per cent), Vodafone (5.2 per cent) and Shell (4 per cent). Other large holdings include BT (2.5 per cent) and Diageo (3.3 per cent).
By Mr Nutt's high standards, his fund has been going through a rough patch. One of the reasons for this underperformance is not so much what he has owned, but what he hasn't. He held mining stock for many years, and made about 10 times his money in Antofagasta, but his decision to sell out of the sector proved too early. Still, there were isolated successes – he sold Lonmin at £43 and it's about £33 today.
His willingness to go against the herd can be seen in his current exposure to housebuilders; Persimmon is still one of his top holdings. With the Government committed to social housing and thus building more houses for everyone, he strongly believes that the industry has further to go despite setbacks this year.
In conclusion, given the troubled times we are living through, I have always felt that clients should be investing with experienced fund managers who have seen market falls before. Tony Nutt is a cool individual who will keep his head while all around him are losing theirs. The fund remains on our buy list, and we expect Mr Nutt will be staying on for a significant time yet at Jupiter.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent
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