JP Morgan Cazenove lowered its mark-to-market earnings per share (EPS) estimates for the next two years across the entire asset management industry by around 3% with Jupiter, previously loved by analysts, suffering the harshest downgrade. Numis Securities offers a similarly negative view.
Its EPS estimates have been sliced 6% and 8% to 33.8p and 36.3p for FY 18 and FY 19 respectively, JP Morgan Cazenove says this reflects a combination of lower market performance owing to its higher equity market exposure and “significant net outflows” racked up so far this year.
It is the only fund group with publicly-disclosed funds where flows have not remained in positive territory over Q1.
However, the analyst note said, coupled with market volatility, asset managers face extra research costs under Mifid II and the planned abolition of box profits.
It expects some of the industry’s biggest players including direct to consumer retail giant Hargreaves Lansdown, as well as fund groups Schroders and Man Group to deliver 1%, 1.7% and 4.2% lower earnings for the full year 2018 respectively. This puts Hargreave’s EPS at 48.9p, Schroders’ at 217p and Man Group’s at 18.7p, more bearish than the Bloomberg consensus by –2.7%, -3.4% and -0.2%.
The downgrades come despite the fact fund groups have consistently been saying active investing would make a comeback as volatility picks up and stock picking proves its worth over cheap passive alternatives, which have been stealing market share.
Markets sold off in February and data from Q1 suggests fund managers across asset classes took a battering with 32 out of 37 Investment Association sectors down on the previous quarter.
Outflows bite
JP Morgan Cazenove found via its Morningstar and Bloomberg channel checks that Jupiter’s net outflows have exceeded £1bn and stem largely from its Dynamic Bond strategy, managed by Ariel Bezalel.
Numis Securities calculated the same result after factoring in £1.1bn of redemptions from the Dynamic Bond fund, which were only partially offset by positive flows into European equities and global convertibles.
The UK stockbroker also said Jupiter Merlin, which was a key source of outflows in 2017, remained a problem fund in Q1, responsible for £206m of outflows.
Its EPS downgrade is even harsher than JP Morgan Cazenove’s at 9% and 10% below consensus of 36.3p and 39.1p for FY 18 and FY 19.
Numis analyst David McCann expects more short-term share price risk ahead of Jupiter’s Q1 update on 18 April.
McCann says: “No doubt these figures will come as a surprise to some investors and could be taken poorly by the market, given that quarterly mutual fund net outflows are extremely rare for Jupiter and have never been this large before”.
Only three of Jupiter’s last 76 quarters have been negative, McCann points out, the largest being -£355m in Q4 2016.
He says value emerging is in the shares and considers the firm “one of the jewels in the crown of the UK asset management industry” and is sufficiently specialist to have a successful future in the industry. However, he adds until there is evidence flows are stabilising or improving outflows could continue to weigh on the share price.
Concentration risk
Recently analysts have raised concerns over concentration risk in Jupiter fund flows.
Berenberg pointed out the Dynamic Bond fund received three quarters of Jupiter’s net inflows over H1 2017.
“Against a backdrop of persistent net outflows from the Jupiter Merlin funds-of-funds range, we believe that group net flows would lack support should an external macroeconomic event hamper flows to its flagship fixed income strategy,” the German bank said in an analyst note following the results.
The Sicav is one of Europe’s largest fixed income vehicles, currently holding £8.05bn, although reaching its peak size of £9.7bn in October 2017, according to FE data.
Excluding the assumption of the contribution from the Dynamic Bond fund, Numis’ EPS forecast puts Jupiter at 25.8p and 27.6p for FY 18 and FY 19.
A spokesperson for Jupiter confirmed performance had been a factor in Dynamic Bond outflows year-to-date.
“We are running a meaningful allocation to AAA government bonds (over 30%) and less credit risk than many competitors, but it is our view that it is better to be early to de-risk than to wait for a deterioration in market conditions and liquidity.”
Bezalel’s UK-domiciled Strategic Bond fund has seen net inflows over the same period.
“The drivers of outflows have been quite different for different clients,” said the spokesperon.
“Typically, we have seen Asian clients opt for riskier asset classes or for more credit heavy/higher risk bond funds. In Europe, the tone has been more cautious and typically clients have opted to asset allocate away from fixed income, often into even lower risk products.
“In most instances, where we have seen outflows, this is due to clients trimming positions rather than exiting the funds. We have a core base of clients who have invested with us for many years and fully understand and appreciate Ariel’s investment approach.”
