Jupiter Income Income Units

The behaviour of global markets in recent years serves as a reminder that long term investing is a marathon, and not a sprint. There are some highly regarded fund managers who have struggled to outperform in recent years, but it doesn't necessarily make them poor managers. Tony Nutt, the manager of the Jupiter Income Trust is one example.

Tony Nutt has held strong views on the commodities sector for some time and having no exposure to mining companies had, until recently, been a drag on performance. He believes that rising commodity prices have not solely been driven by Chinese demand, but that speculation has also been a major contributor. Commodity prices have eased with the end of the second round of quantitative easing (QE2), slowing global growth and the turmoil in the Middle East. The shares of mining companies have therefore been weaker this year.

Tony Nutt also believes there is a hidden danger for equity income investors by having a large exposure to mining companies. Although these companies are currently thriving, their dividend pay outs remain historically low raising the question of why these companies are cautious of paying higher dividends.

The main attractions for Tony Nutt are larger companies with global earnings and low levels of debt, strong cash flows and rising dividends. Companies with significant overseas earnings also offer some insulation against sterling weakness (if sterling weakens relative to a company whose earnings are denominated in dollars, for example, this will make the earnings of the company more attractive when converted into pounds although, the reverse could also happen). The fund therefore has a bias in companies with large overseas earnings.

Although corporate profits are generally healthy and balance sheets strong, consumer demand remains weak. This is no surprise as the housing market remains fragile, unemployment is high and wages are stagnant. Against this backdrop, the fund also has a focus on attractively valued companies that have the potential to pay substantial dividends. These include pharmaceuticals companies such as AstraZeneca and GlaxoSmithKline, telecoms businesses such as Vodafone and BT, and oil and gas companies such as Shell, BP, and BG Group. There is also exposure to tobacco and selective insurance companies.

This positioning has led to above average performance since the start of the year, which is encouraging, but the exposure to banks such as Lloyds has hampered returns owing to the mis-selling of payment protection insurance policies and the on-going debt issues in Ireland where it has large assets.

Given the fund's fairly defensive positioning, we believe it should perform well in an uncertain climate. However, one concern is whether this positioning is significant enough to deliver outperformance. The recent signs are encouraging but it is only short term. Tony Nutt remains a good manager in our view, but we are disappointed with the performance over the last few years. We hope that it can stage a significant recovery soon driven by improved stock picking. Please note the Income Trust's charges can be taken from capital which could increase the potential for the capital value to be eroded. This fund is not currently on the Wealth 150 list of our favourite funds in each sector.