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Jupiter Absolute Return Fund
Citywire Wealth Manager Retreat 2013
FOR PROFESSIONAL AUDIENCES ONLY. NOT FOR RETAIL INVESTORS.
Presented by:
James Clunie, Fund Manager Director
Louis Wood, Business Development Director
John Tevenan, Business Development Director
What are the Fund’s strengths?
The manager has generated strong returns per unit of risk managing a similar fund
Jupiter has the resources, team and focus to develop this fund
The fund has a potential ‘edge’, in single-stock short-selling
The views expressed by the fund manager at the time of presentation may change in the future. Past performance is no guide to the future. James Clunie started managing the Jupiter Absolute Return Fund on 2nd September 2013
2
Manager’s long/short track record (1)
Strong outperformance against the the sector
3
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Aug-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Lipper Global Absolute Return GBP High Lipper Global Absolute Return GBP LowLipper Global Absolute Return GBP Medium SWIP UK Flexible Strategy A Acc
SWIP UK Flexible Strategy (from 01.09.09 to 22.04.13)
Source: Lipper as of 22.04.13. Past performance is no guide to the future.
Manager’s long/short track record (2)
Equity-like returns with limited drawdowns and volatility
4
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Aug-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
FTSE 100 TR MSCI AC World TR GBP SWIP UK Flexible Strategy A Acc
Source: FE as of 22.04.13. Past performance is no guide to the future.
SWIP UK Flexible Strategy (from 01.09.09 to 22.04.13)
Firm and process
Jupiter has team strength in Absolute and Total Return
Jupiter manages a series of absolute and total return type funds: Jupiter Europa SICAV
European long/short equity
Jupiter Strategic Total Return
Conservative multi-assets
Jupiter Absolute Return Fund
Global multi-assets
Managers of these funds have good access to experienced risk managers and to long/short idea generation
Independent firm
Source: Jupiter 2013.
Focused on performing for clients A strong culture of accountability Industry recognition
6
Investment process
Well-researched positions in risk assets…
Risk Control
Alpha generation through long and short positions
+
Moderate net market exposure reduces
‘drawdowns’
Aim for positive returns over rolling three year
periods
Attractive risk adjusted returns
‘Macro-cognizant’ but not driven by
top-down thinking
Evidence-based quantitative screens can highlight ideas
Willing to take risk when it is likely to
be rewarded
Disciplined security selection process
Specific short-selling risk
management process
Direct contact with
company management
Top-down
awareness can generate thematic ideas and assist in risk management
Macro view Equity selection
Portfolio positioning
Risk management
In-depth company analysis
…with the aim of generating solid returns per unit of risk
7
Portfolio construction Manager objective: seeks to generate absolute return, independent of market conditions, by investing on a global basis
Long book construction
8
Not fund restrictions, represents fund manager style.
Typically 40 - 70% exposure 30 - 70 positions
Tactical positions
Core positions
Portfolio Construction
Macro View Manager Objective
Equity selection Risk Management Portfolio positioning
Stocks have overly pessimistic earnings estimates
Positive news-flow in heavily-
shorted stocks Predatory trading opportunities
Buy signal from a quantitative screen (e.g. Piotroski score)
Apparently ‘under-priced’
securities under most scenarios
Firms undergoing restructuring or seeing an improvement in conditions
Stocks pass a ‘minimum quality’
checklist (see appendix for details)
Short book construction
9
Typically -10 to -40% exposure 10 – 20 positions
Tactical positions Core
positions
Portfolio Construction
Macro View Manager Objective
Equity selection Portfolio positioning
Not fund restrictions, represents fund manager style.
Risk Management
Signal from stock lending data ‘Over-priced’ equity, plus
a catalyst Predatory trading opportunities
(e.g. likely index deletions)
Balance sheet weakness Sell signal from a quantitative
screen (e.g. Beneish M-score, asset growth)
Suspect accounting policies Thematic ideas
Potential sources of return
Long and short stock positions
Net equity beta (as long and short positions need not balance)
Other sources of return: Bond holdings
Use of options (from time to time)
Currency returns (usually implicit, but sometimes explicit)
Occasional use of other security types (consideration of a firm’s capital structure)
Returns on cash
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Risk management
Source: Jupiter, 2013. *VaR limit: 20% of fund value using a 20 day (forecast) 99% VaR, evaluated using a one year historical model
The Fund is subject to the diversification rules for UCITS funds, but includes further risk control measures: Regular VaR and stressed VaR calculations - aim for stressed VaR to be well below the VaR limit*
Oversight by risk and compliance specialists
Tailored risk management for short positions: Re-assess as catalysts fade, or when positive new information emerges
Use ‘intelligent’ (i.e. neither rigid nor telegraphed) stop losses - to reduce large loss risk and to temper any aversion to realizing losses
Analysis of stock lending data, to observe the actions of other short-sellers and to guard against ‘crowded exit’ risk
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Aiming for positive returns over rolling three year periods
Potential Edge
What is the Manager’s edge?
We believe that the manager’s edge lies in single-stock short selling, via: A strong understanding of the informational-value of stock lending and short-
selling data
A thorough awareness of the risks in short-selling
A combination of quantitative and fundamental analysis of short positions, which can make the fund more robust to shocks
The views expressed by the fund manager at the time of presentation may change in the future.
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An uncommon specialization
The Fund’s strengths
Fund Manager has a strong track record with this type of mandate
The right firm and team
A potential investing ‘edge’
The views expressed by the fund manager at the time of presentation may change in the future. Past performance is no guide to the future. James Clunie to manage Jupiter Absolute Return Fund from 1st September 2013
14
Appendices
About Jupiter Investment Policy More about the Investment Process Outlook
Introduction to Jupiter
Assets under management
Mutual Funds, £22,768m
Segregated Mandates, £3,488m
Private Clients, £2,130m
Investment Trusts, £659m
Established in 1985
453 employees including 48 Investment Professionals
One of Europe’s most successful and respected fund management houses, managing assets of £29.0bn
Market cap £1.5bn
Source: Jupiter 30.06.13.
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1st quartile 2nd quartile 3rd quartile 4th quartile
Performance over 10 years**
Jupiter’s 4 principles: people, philosophy, process and performance
*Source Jupiter as at 30.06.13. **Source: FE, bid-to-bid, reinvested to 30.06.13. Past performance is no guide to future performance. Cumulative performance for funds running 10 years or more. Pie chart = performance weighted by number of funds. Past performance is no guide to future performance.
People: Team of 36 fund mangers*
Philosophy: Investment philosophy
Process: Investment process
Low fund manager turnover 21 fund managers with Jupiter >10 years 14 managers >£500m in assets No one manager runs >20% of AuM
Freedom to invest: No house view or Buy lists
Individual accountability Leads to high conviction ideas Avoids biases of committees
Portfolio concentrated on “best ideas” Do not track the index, high degree of active share
Disciplined use of stock selection themes Direct company contact is key Quantitative analysis to assess valuation Risk management integral to investment process
65%
14%
14%
7%
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Industry recognition
Jupiter’s range of awards – over 100 in the last 5 years alone – is a testament to our company-wide performance record*
Jupiter’s asset management success… Talented team
Investment philosophy
Fundamental investment approach
*Source: Jupiter, Includes Jupiter Unit Trust Managers Limited and Jupiter Asset Management Limited. Past performance is no guide to the future.
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Fund management team 19
Source: Jupiter as at 31.07.13. *Please note that some fund managers are members of more than one team.
UK Equities European Equities Environmental Investment Multi-Manager Asian Equities Fixed Interest
& Multi-Asset
Anthony Nutt Richard Curling* Steve Davies Alastair Gunn Ian McVeigh Derek Pound Chris Watt * Ben Whitmore
Alexander Darwall Michael Buhl-Nielson Cédric de Fonclare Gregory Herbert* Stephen Pearson
Luca Emo Javier Gella
Emerging European Equities Elena Shaftan Colin Croft
Charlie Thomas Chris Watt*
Abbie Llewellyn-Waters
Sustainable Investment Research Emma Howard Boyd Mark Evans Jon Wallace
Corporate Governance Cynthia Pinniger Ashish Ray
John Chatfeild-Roberts Peter Lawery Amanda Sillars Algy Smith-Maxwell
David Lewis
Far Eastern Equities Philip Ehrmann* Ben Surtees Charles Sunnucks
Indian Equities Avinash Vazirani Amélie Thevenet
Japan Equities Simon Somerville Dan Carter
Miles Geldard Ariel Bezalel Lee Manzi Rhys Petheram Vikram Aggarwal Hilary Blandy Joseph Chapman Luca Evangelisti Harry Richards Nicole Weiss
Global Absolute Return James Clunie Philip Gibbs
CIO: John Chatfeild-Roberts Deputy CIO: Stephen Pearson
Financials US Equities Investment Companies
Treasury Global Emerging Markets
Guy de Blonay Robert Mumby
Sebastian Radcliffe* Richard Curling* Oliver Burns
Caroline Horsford Kathryn Langridge Philip Ehrmann*
Gregory Herbert* Sebastian Radcliffe* Payal Bagchi
Global Equities
Manager profile
Fund Management Director: James Clunie Jupiter Asset Management
2013 – Jupiter Asset Management Fund Manager, Global Absolute Return
2007 – 2013 Scottish Widows Investment Partnership Investment Director, Equities
2003 – 2007 University of Edinburgh Senior Lecturer in Finance, Management School & Economics
2000 – 2002 Aberdeen Asset Management Head of Global Equities
1989 – 2000 Murray Johnstone International Director & Head of Asset Allocation
Qualifications BSc Mathematics & Statistics and PhD Management (Edinburgh University) CFA Charterholder
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Investment policy
The Fund may invest globally, long or short, in a variety of asset classes, including equities, bonds, cash and currency transactions
Short positions must be taken via derivatives, in accordance with UCITS rules
The Fund may be concentrated in any one or a combination of such assets
There will be an emphasis on equity long/short, as this is where the manager has most experience and knowledge. However, the freedom to move up a firm’s capital structure, across geographies or into other asset classes is valuable, if used with respect
21
More about the investment process
Primarily a ‘bottom-up’ security selection process
‘Macro-cognizant’ to help understand risks and themes
Evidence-based quantitative screens (e.g. Piotroski scores, asset-growth rankings) assist in identifying long and short candidates
Other sources of ideas include: colleagues, company meetings, sell-side analysts, competitors, mosaic information and background reading
Fundamental analysis (using Holt and/or DCF with sensitivity analysis) is used to estimate a fair value range. The manager reads the annual report and tests each stock idea against a stock ‘checklist’
22
Stock checklist
Type of Measure Specific Question Value Is the stock cheap on DCF? Value Is the stock cheap on conventional value metrics? Quality Is the RoE, RoCe and gross profitability high? Quality Is the Piotroski score high? Momentum Is 6 month momentum positive? Momentum Reversal Is 18 month momentum negative? Accounting Are accruals low? Accounting Are accounting policies 'clean'? Asset growth Is asset growth low? ESG Is the firm well governed? Balance sheet Is the Altman z-score high? Balance sheet Are other balance sheet ratios strong? Issuance Does the firm buy-back stock/ issue rarely? Earnings Revisions Are revisions positive? Earnings Estimate dispersion Are eps forecasts in a tight range? Visibility Does the stock have low visibility?
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How will the portfolio be structured?
The portfolio will tend to have a slightly positive equity beta, as long ideas will generally exceed actionable short ideas. The fund may be net short, though, if short ideas should predominate.
Gross and net positions will tend to be greater when measured market ‘turbulence’ is low, or when general risk aversion is overtly high.
The style of the fund will tend to be value/ quality but can vary with market conditions.
Turnover in short positions (generally around 100-400% per annum, one-sided) should exceed that for the long positions (around 20-50%)
A small proportion of the fund is likely to be in less liquid securities.
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How will the portfolio be structured?
From time to time, there may be option positions in the fund. This will include: writing covered calls in stocks that have achieved price targets
writing slightly out of the money put options on preferred stocks after market corrections.
Other types of security (e.g. bonds, convertibles) will be included from time to time, especially during market dislocations
In the absence of strong new long or short ideas, the manager is willing to hold substantial cash deposits (i.e. short-term deposits at major banks and cash at the custodian bank) or ‘near-cash’ (Treasury bills). This can improve the return per unit of risk taken, and provides ‘optionality’ should any market dislocations occur.
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Risks
Being a global, multi-asset long/short mandate, the fund is potentially exposed to all types of investment risk, including: Equity market risk (net equity beta)
Stock selection risk (with theoretically unlimited loss potential on short positions)
Interest rate and credit risk on bond holdings
Changes in volatility affecting option prices
Option writing has potential for large losses
Forced position covering if VaR limit is breached
Liquidity risk (most likely to occur with short positions where the need to cover may arise)
Currency exposure risk.
26
Jupiter risk management process: Three line defence approach
Individual Fund Manager
Independent in house monitoring
Investment Risk Committee
Portfolio-Review Committee
Compliance Monitoring Committee
Risk Committee
Compliance review
Internal audit review
Chaired by CFO Quarterly meeting
Chaired by Head of Compliance Quarterly meeting
Chaired by CIO Quarterly meeting
Chaired by Head of Investment Risk Monthly meeting
Daily, weekly, monthly, quarterly reports
Dealing restrictions / mandate breaches Charles River
Charles River, Beauchamp, Bloomberg, RiskMetrics, Reuters, Holt
Factor Risk: BARRA Aegis Attribution: FactSet / BARRA,
Day to day reporting
Analysis
Independent review
Portfolio Construction
Macro View Manager Objective
Equity selection Portfolio positioning
Risk Management
Risk and performance: RiskMetrics, BARRA, FactSet, Bloomberg, Beauchamp
27
Strict risk management at fund level
Structure
Process
Dynamic
Long positions typically below 5%; short positions typically below 3% Typical Net Exposure: +30% to 35% Gross Exposure Fund Restriction: 200% (typical range 70% -80%)
Weekly risk review: portfolio analytics and the investment team Independent Risk Management Oversight (Riskmetrics) Analysis of portfolio risk at stock, industry and country levels, Portfolio VaR, composition of VAR by position and risk factors. Fund specific stress tests
Net and gross exposures vary with idea generation and appetite for risk Use listed and OTC derivatives (futures and options) to manage risk
at portfolio and position level. Maintain a high level of portfolio liquidity
Portfolio Construction
Macro View Manager Objective
Equity selection Portfolio positioning
Risk Management
28
Short selling risk management
Short positions tend to be more trading-oriented than long positions (due to the distribution of returns on stocks)
Continuous review of news releases and new information around firms that have been shorted
Re-assess when positive new information emerges, or when catalysts fade
Use of ‘intelligent’ stop losses (i.e. stop losses that are neither rigid nor telegraphed) to reduce the risk of large losses and to force acceptance of mistakes
Daily review of stock lending data, to observe the actions of other short-sellers and to guard against ‘crowded exit’ risk
29
3 years risk/reward
-10%
-5%
0%
5%
10%
15%
20%
25%
0 2 4 6 8 10 12 14 16
Cum
ulat
ive
Ret
urn
from
22.
04.1
0 to
22.
04.1
3
Annualised Volatility from 22.04.10 to 22.04.13
Lower range of volatility Source: FE from 22.04.10 to 22.04.13. Past performance is no guide to the future.
James Clunie - SWIP
30
Outlook (what things do we know?)
The views expressed represent those of the manager at the time of writing and may change in the future.
Developed market central banks are ‘guiding’ for policies of ‘financial repression’
Medium-term return outlook for emerging market equities are better than those for developed markets (lower starting valuations)… but short-term news-flow is negative
‘Buy and hold to maturity’ returns from bonds will be low
On a global basis, liquidity is supportive for risk assets
31
Disclosure
Jupiter Unit Trust Managers Limited (‘JUTM’) and Jupiter Asset Management Limited (‘JAM’) are both registered in England and Wales (nos. 2009040 and 2036243). The registered office of both is 1 Grosvenor Place, London SW1X 7JJ. JUTM and JAM are authorised and regulated by the Financial Conduct Authority whose address is 25 The North Colonnade, Canary Wharf, London E14 5HS.
This presentation is intended for investment professionals and not for the benefit of private investors. However anyone attending the presentation or who has the opportunity to view the accompanying slides should bear in mind that the value of an investment in a unit trust and the income from it can go down as well as up. It may be affected by exchange rate variations and you may not get back the amount invested. Initial charges are likely to have a greater proportionate effect on returns if investments are liquidated in the shorter term. Quoted yields are not guaranteed. Past performance should not be seen as a guide to future performance.
The Jupiter Absolute Return Fund aims to profit from falls as well as rises in value of market indices, currencies or shares by using derivatives. This may cause periods of high volatility for the prices of units in the Fund. The Fund may incur losses greater than its initial investment into derivative contracts (although unit holders will not incur any liabilities beyond their initial investment). The Fund is able to gain market exposure in excess of its net asset value which can increase or decrease the value of units to a greater extent than would have occurred had no additional market exposure beyond the Fund’s net asset value been in place. The Fund’s value is unlikely to mirror increases and decreases in line with the respective markets it is invested into. Performance fee is 15% of outperformance above a hurdle rate, 3 month Sterling Libor, subject to a High Water Mark. Further information is contained within the Key Investor Information Document (KIID). This Fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The KIID, Supplementary Information Document (SID) and Scheme Particulars are available from Jupiter on request.
For your security we may record or randomly monitor all telephone calls. If you are unsure of the suitability of an investment please contact your financial advisor. Any data or views given should not be construed as investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.
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Contact’s- UK Client Coverage Group 33
Louis Wood Business Development Director Wealth Management, UK Client Coverage
0207 314 4788
07900 055 188
Bryan Bushnell Business Development Manager Wealth Management, UK Client Coverage
0207 314 4728
07920 188 186
Contact’s- Global Financial Institutional Group 34
John Tevenan Sales Director Global Financial Institutions Group EMEA Client Coverage Team
0207 314 7491
07841 451425
Michael Daly Client Relationship Manager Global Financial Institutions Group EMEA Client Coverage Team
0207 314 6481
07887 455967
