Jupiter Income Trust: August 2021 update

• The fund is managed by Ben Whitmore who is an experienced value investor
• The process focuses on investing in fundamentally good companies that are out of favour
• The manager makes selective investments overseas where he finds good opportunities
• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Jupiter Income Trust focuses on undervalued, mainly UK companies which could pay a dividend. This approach can mean the fund falls out of favour through certain periods of the market cycle. The manager operates a concentrated portfolio of around 40 stocks, and so each position can influence performance for good or bad which can increase risk.

We think the fund would work well alongside other UK equity income funds as it has quite a distinct style bias which could add diversification to either an income or more general portfolio.

Manager

Ben Whitmore has been managing funds since 1996 and is an expert when it comes to unearthing undervalued companies. He is assisted by Dermot Murphy, and the two have been working together for a number of years. As well as the Jupiter Income Trust, the two run Jupiter UK Special Situations and Jupiter Global Value Equity, using the same process and value bias. Whitmore is also a director at Jupiter, and head of the value equities strategy, a role that we feel is complimentary to his fund management responsibilities. There have been relatively recent analyst additions to the team in Brian McCormick and Ellen Mann.

Process

The fund aims to provide investors with income and capital growth, through investing in stocks that the managers believe are incorrectly valued by the wider market. This focus on out-of-favour companies is called value investing. Value has struggled over the past five years, but the managers believe this won’t last forever and it will deliver great returns in time – although there are no guarantees.

The team looks for companies with strong balance sheets, low valuations and which have a different set of risks from others in the portfolio in order to diversify potential returns. There are companies from a variety of sectors and industries within the fund. Holdings are very much chosen on their individual merits and are unrelated to how the index looks. The managers look to uncover unloved stocks capable of recovery and paying increasing dividends. As such there will always be an element of uncertainty in the investment case, but this should be more than reflected in the price of the shares.

Investments in the fund include Shell, which has a plan to move to net zero carbon emissions by 2050. Whilst there is some scepticism around this target, Whitmore believes the valuation is commensurately low, and the timeframe long enough for a new company to emerge. Nokia is a global leader in telecoms networking equipment but a poorly executed merger in 2016 led to it losing 5G technology leadership. The company has put in place new management, and the team believes that the low valuation doesn’t reflect Nokia’s market strength.

The key characteristic of these companies and a feature of the investment process is balance sheet strength. This allows temporarily weakened or out of favour companies to remain solvent for longer, whilst they recover.

Examples of some recent sales from the portfolio include Barrick Gold whose shares have performed well on the back of increasing gold prices from Q3 2020. Wolters Kluwer is a software and IT solutions provider which performed well and thus it has become a source of funds for better value ideas elsewhere. Finally, miner Anglo American had performed well since 2016 as metals prices have recovered to quite high levels. The company remains very cyclical which may mean the high level of current profits are unsustainable.

The managers remain confident on the dividend outlook and consider that most companies that haven’t already returned to paying dividends will do so in time although there are no guarantees. They are wary of chasing yields that look high today but are unsustainable and prefer to focus on the long-term. Yields are variable, not guaranteed and should not be seen as an indicator of future income.

Culture

Whitmore and Murphy run an established value franchise at Jupiter, where they are supported to manage money in a differentiated way. Jupiter is a listed company, traded on the London Stock Exchange. Employees’ bonuses are paid in part in deferred cash, and part in Jupiter shares which are released over time. This encourages a long-term focus, which we believe aligns managers’ goals with that of their investors’.

Jupiter has recently completed its acquisition of asset manager Merian, following shareholder approval. The Jupiter value team is not directly impacted by the merger, but we note that Jupiter will now have a larger UK equities team which could provide a welcome additional source of ideas or challenge.

The Jupiter income team integrate environmental, social and governance (ESG) factors into their company analysis. They can draw on dedicated resource within the company to assist with their work in this area and for voting on AGM proposals. As long-term investors, they believe this helps to highlight businesses that use more sustainable practices and could thrive over the long term. This could drive long-term dividends and it could also uncover risks that are less obvious through more traditional company analysis.

Cost

The fund has an annual ongoing fund charge of 0.94% but through HL, clients can secure an ongoing saving of 0.34%, reducing the net ongoing charge to 0.60%. Part of this reduction is paid as a loyalty bonus, which could be taxable if held outside of an ISA or SIPP wrapper. The HL platform fee of up to 0.45% a year also applies. Part or all of the annual charge is taken from capital rather than income generated, whcih could boost income, but reduces the potential for capital growth.

Performance

Whitmore has managed this fund since January 2013 and has managed various UK equity value/income portfolios over many years. More recently he has also managed global value portfolios. Over his career he has performed well although past performance is no guarantee of future returns.

Over the last 12 months to the end of July 2021, the fund returned 33.3%* vs the FTSE All Share return of 26.6% and the investment association category return of 30.6%.

Many UK Equity Income funds have the potential to hold up better than the wider market in adverse market conditions. But in 2020 the speed and scale of the COVID crisis had an immediate impact upon the payment of dividends. Some of the natural hunting grounds for income, such as banks and oil, were hit hard as the pandemic reduced demand for travel and caused significant falls in GDP across all economies. Investors sought out ‘safe haven’ investments and, in this environment, resilient growth companies performed better.

Until Q3 2020 and the vaccine announcement, value investing remained a deeply out of favour and unloved area of the UK market. This was a catalyst for companies whose prospects are linked to the health of the economy (cyclical sectors) to recover such as travel & leisure and oil. In a reversal to the initial stages of the pandemic, defensive sectors such as healthcare lagged. The IA UK Equity Income sector outperformed the FTSE All Share, partly as many funds in the sector use a more value-focused investment approach. These companies had previously underperformed over many years those favoured for their perceived steadier growth prospects.

Holdings in the fund that performed well included Kingfisher, the home improvement goods retailer, as spending on DIY increased markedly during the COVID-19 pandemic. NatWest Group performed well after the vaccine announcement. In addition, it continued to perform through 2021 driven by the announcement that they were disposing of their Irish business. BT Group benefitted from a successful UK 5G auction, and an Ofcom ruling clearing the way for nationwide fibre rollout.

Holdings that detracted included interdealer broker ICAP, whose acquisition of Liquidnet was not well received by investors as it was financed via a cut in the dividend and a rights issue. The team does believe however that the purchase does have strategic merit. Barrick Gold performance was weaker after the COVID vaccine announcement and investors demand for ‘safe haven’ assets declined. The fund’s holdings in this company were switched into silver miner Fresnillo.

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2021.

Find out more about the Jupiter Income Trust, including charges

Jupiter Income Trust Key Investor Information