Jupiter European: July 2023 fund update

How it fits in a portfolio

The Jupiter European fund aims to grow investors’ money over the long run by delivering a return higher than its benchmark, the FTSE World Europe ex UK index. The managers of the fund prefer to invest in what they consider are the larger, more stable European businesses, specifically the ones they believe offer the best growth potential over the long run.

We think the fund could offer exposure to Europe as part of a global investment portfolio, or sit alongside other European funds focused on using different investment styles.

Manager

Mark Heslop and Mark Nichols joined Jupiter from Columbia Threadneedle (CT) in 2019 and have a combined total of over 40 years’ experience investing in Europe. They took over management of the Jupiter European fund in October 2019.

Prior to this, Heslop was a part of CT’s European equities team for 11 years and was appointed lead manager of their European Smaller Companies Fund in 2013. Nichols joined CT in 2015 and became co-manager of the European Select Fund, which currently features on our Wealth Shortlist.

The managers have built up the team since joining Jupiter. This has included adding Phil Macartney, a fund manager with 14 years’ experience across UK and European companies, Sohil Chotai, an assistant fund manager with 9 years’ experience of analysing European companies, and Nikisha Mistry, who has 4 years’ experience as a European equities analyst.

Each team member is responsible for researching and analysing 40-50 European stocks, and apart from Mistry, everyone has portfolio responsibilities. Macartney is named co-manager on the Jupiter European Smaller Companies Fund and Chotai is co-manager of the European Special Situations Fund. Each European fund shares a similar investment process, so we feel the managers can comfortably manage their commitment to each.

Heslop and Nichols also view it as a team-based approach, so encourage discussions, debate, and the sharing of ideas across each European fund.

Process

The managers want to identify world class companies across the European continent and have adopted a clear process to help with this. To begin their search, they filter a wide universe of 1500 European companies down to a list of roughly 200. These are companies they feel warrant deeper analysis and have the potential to make it into the fund.

Out of the 200 companies, only 30-50 will ever make it into the fund. The rest are left on a watch list, which is reviewed frequently and often used as a source of new investment ideas. Because of this, the fund can be quite concentrated at times, meaning each investment can have a meaningful impact on performance, which increases risk.

The companies that make it into the fund, in the managers eyes, offer the best growth potential over the long term. They want to see the value of a business through its long-term cash flows but also its resilience against short-term market noise. As a result, each company must have recurring returns on capital, offer unique products or services which others struggle to replicate and be in a strong financial position. Identifying companies that have a global reach in regions like the US or Asia is also important, as they are less likely to be as reliant on the state of Europe’s economy.

Given the managers focus on holding these companies over the long run, to benefit from steadier growth instead of trying to time the market, portfolio turnover is kept relatively low. This means keeping buying and selling to a minimum. Though, there have been a few changes to the fund this year.

They decided to sell the fund’s position in Temenos AG, a Swiss IT business specialising in software for banks and other financial service companies. The managers feel the company is facing an ever-increasing list of challenges – rising regulations, more competition and an increased need for investment to name a few. They continue to believe it offers a good product but given its challenges and management failing to deliver better results more recently, they decided to sell.

They also decided to make notable reductions to the fund’s investment in RELX, a global provider of information-based analytics / decision tools, and Danish based pharmaceutical giant Novo Nordisk following a strong run of performance.

In terms of new investments, the team added Swedish engineering company Sandvik. It specialises in mining and rock excavation, including the manufacturing of the machinery. The team feel it’s attractively valued compared to peers and offers exciting long-term growth potential.

Culture

The fund managers at Jupiter are given autonomy to invest the way they see fit. They believe this will benefit investors over the long run, but the autonomy comes with an appropriate level of challenge from others in the business. This business setup allows Nichols and Heslop to focus on fund management, their team, and maintain flexibility.

Each manager is incentivised in line with the performance of their funds over various timeframes. We think this aligns their interests with those of investors and helps the managers to focus on aiming to deliver strong performance for clients.

ESG integration

Jupiter’s approach to ESG (Environment, Social and Governance factors) is fund manager led, so the fund managers themselves are responsible for implementing ESG in their investment decisions. Each manager is held to account for their ESG decision making and are frequently challenged on their ESG analysis by the in-house Governance and Sustainability team.

All fund managers at Jupiter receive support from these teams, drawing on their specialist ESG knowledge. Where red flags are raised, the managers go away and investigate. Nichols and Heslop also form their own views on ESG issues and incorporate them into their research, believing them to be important to the long-term quality of a business.

We like that engagement is not delegated to a separate department. Instead, the fund manager who made the decision to invest in the company leads engagement activity directly, allowing more meaningful and relevant engagement. The firm also votes at all shareholder meetings and provides a monthly voting record, available via its website, including rationale where it votes against management. More information about the firm’s ESG policies, voting record and engagement case studies can be found in its annual Stewardship report.

Cost

The ongoing annual charge for this fund is 0.99%. This makes it one of the more expensive funds in the Europe sector. The HL platform fee of up to 0.45% per year also applies.

Performance

Since Heslop and Nichols took over the fund in October 2019, performance has been mixed, though this is a relatively short timeframe. The fund performed relatively well during the first two years under their tenure, assisted by the tailwinds of the growth style of investing being in favour. Past performance is not a guide to future returns.

Despite this strong start, the fund’s performance over the course of 2022 was weak. It fell significantly more than its benchmark, partly down to style headwinds. This was amplified by the strong returns generated by some of the companies they didn’t own. Given the managers style, they don’t invest in oil & gas companies and have little exposure to financials, like banks. Both these areas did well, so the fund missed out on gains here.

While 2022 was a period the managers would rather forget, performance started to pick back up at the very end of the year. A trend which has continued into 2023. Over the last 12 months, the fund has returned 19.54%* versus the FTSE World Europe ex UK's return of 19.64%. Underperformance narrowed with the manager's style coming back into favour. The fund's more growth focused investments bounced back and started to deliver stronger returns.

Edenred was the funds top performer over this period given its strong relationship with inflation. The company provides employee benefit solution services including meal vouchers and loyalty programmes, which are seeing face value increases with inflation. Pharmaceutical giant Novo Nordisk was also a key contributor. The company continues to perform well given the positive ground it’s breaking in the world of obesity drug development.

It wasn’t all good news though. Sporting brand Adidas and software provider Dassault Systemes were among the fund’s main performance detractors. Adidas terminated its partnership with Kanye West which hurt the brand and Dassault Systemes also underwhelmed.

Despite the bounce back this year, the fund is still behind its benchmark under Nichols and Heslop’s tenure. European markets continue to be impacted by persistent inflation and rising interest rates, meaning there are plenty of challenges ahead.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM to 30/06/2023.

More about Jupiter European, including charges

Jupiter European Key Investor Information