Terry Smith has published his annual performance update letter, plus a look at companies in the listed active fund manager sector. Companies covered JUP, ASHM, IPX, POLR, PMI.
The FTSE 100 fell -1% to 7613 last week. The Nasdaq100 was up +3.2% and the S&P was up +1.8% in the last five trading days. The best-performing commodity was palm oil (CPO-MT) +4.5% while Brent crude rose +2.5%. I think food and energy prices are worth following at the moment, as rising commodity prices might undermine the case for interest rate cuts.
Last week Terry Smith published his annual performance update letter. The whole letter is worth reading. My feeling is that most professional fund managers don’t add value. Amateur investors would be better off buying low-cost index trackers and using Sharepad to invest in high-return smaller companies where we don’t suffer the liquidity constraints that the professionals have to deal with. However, a select few large-cap fund managers do seem to outperform over the years and are worth paying attention to (Terry Smith is one, Nick Train is another, Richard Oldfield also springs to mind). Interestingly, all of those mentioned studied history at university. My theory is that historians understand how to interpret sources and then form a narrative. They appreciate that a convincing narrative has to compete with other stories though. A good example is the question “What were the causes of the First World War?”* No one disputes the events, but there’s a lot of room to emphasise the significance of different events to form alternative narratives. That comfort with ambiguous events can be useful for fund managers who need to analyse the stories that drive corporate performance.
That said, you can’t expect an active fund manager, even a historian, to outperform every single year. Nick Train has struggled in recent years and last year Terry Smith underperformed the MSCI World Index by 5% which was up +17%. Terry’s longer-term track record since inception on 1st Nov 2010, is nearly 4% p.a. ahead of the fund’s benchmark index. This FT article suggests that over 90% of fund managers underperform the index over a decade, so Fundsmith’s performance since inception is exceptional.
Although I mainly use Sharepad for investing in equities, it is possible to look up data on funds and investment trusts. The GBP accumulation units for Fundsmith have the ticker 4FAAAD (in black in the chart below versus MSCI World ETF in red).
Richard built a Terry Smith filter in 2019 and wrote it up here. I’ve used the same filter but tweaked it to have a minimum RoCE of 20% and minimum operating margin of 15%. That gives four AIM stocks: Global Data, Judges Scientific, Keyword Studios and Quartix.
For FTSE All Share companies the list includes Halma, IHG, RELX, Moneysupermarket.com, Experian, and Sage.
Interestingly the last 3 companies were on the list when Richard ran the filter in 2019, and MONY and EXP were also in Phil’s Quality Share Filter which he wrote up last week. That’s not surprising, as both filters look for companies with consistently high returns.
This week I look at trading statements from active asset managers: Impax, Jupiter, Ashmore, Premier Miton and Polar Capital (the latter was The Quality Small Cap Investor’s pick for 2024). The table below shows that ASHM trades on 3.8% of AuM while JUP and PMI are the cheapest on this measure.
I’ve annualised the most recent Sept-Dec redemptions, and on this measure, POLR looks like it could be troubled if the current trend doesn’t reverse. Although Jupiter saw inflows in the final quarter of 2023 “star” fund manager Ben Whitmore is leaving, which knocked the shares -16% when it was announced last week.
Most of these active fund management companies aren’t run by historians, but given the fund redemptions and low valuation multiples, perhaps they should be.
Impax AM Q1 AuM Update
This environmental fund manager with a September year end announced a quarterly AuM update. I commented last week, that financial markets businesses like CMC and Plus500 looked to have seen a strong end to the year, whereas some consumer-facing retailers like JD Sports are still under pressure.
Market movements of £2.7bn, meant that AuM for the group was +4.6% in the quarter. That’s despite still seeing outflows in the most recent quarter (£948m in their listed equity business; on an annualised basis outflows are 10% of group AuM).
The fund manager put out a second RNS on the same day, to say that they had made a small (£350m AuM) acquisition in fixed income. That makes sense, currently £37bn of IPX’s group £39m AuM is in listed equities, so it makes sense for them to expand into fixed income and also private markets.
Valuation: Equity Development have left their forecasts unchanged, they are assuming AuM grows +10% to £41bn. That implies a PER of 17x Sept 2024F, dropping to 14x PER Sept 2025F. Equity Development points out that the fund manager Gresham House was acquired last year on a PER multiple of 37x.
Opinion: I own Impax and increased my position size in October at 372p per share; one of the attractions to me is the 20-year track record of environmental investing. That’s very hard to replicate, but it also means Impax with its ESG focus is less exposed to “star fund manager risk”.
Polar Capital Q3 AuM Update
Polar Capital has a March year-end, and so Sept-Dec last year is their Q3. They saw £1.1bn of outflows in the most recent quarter. That’s a significant acceleration versus earlier in 2023. In the management commentary, they saw redemptions in their Biotech, UK Value, Technology and European Opportunities. The positive spin they put on this is that redemptions were concentrated in terms of number of clients, as opposed to a wider trend. They also talk about a strong pipeline of client interest.
Below is a slide from their H1 presentation showing performance across the different funds. They have 12 1st quartile funds, which does look impressive. They don’t recreate the same chart for recent performance data but did say in November 40% of funds were outperforming their benchmark YTD. It’s also worth noting that they did close funds in 2023, so obviously those underperforming funds wouldn’t be included in the sample.
Despite the outflows, there was a large jump in performance fees (after paying staff their share) from £1.2m to £9.6m. That’s good news, but I think it would make sense to treat performance fees as less likely to recur than fees charged as a percentage of AuM.
Valuation: Equity Development raised forecasts, by +19% for FY Sept 2024F to 39.5p of EPS, while leaving the following year largely unchanged (showing a decline in EPS to 36.5p). That puts the shares on a PER of 11x and 12x the following year. Note to the high dividend yield 10%, but also that dividend is uncovered. Then again, they have net cash of £107m, which is just under a quarter of the market cap so they can afford to pay an uncovered dividend for several years.
Opinion: If 2024 is a strong year for markets and we see net inflows then the whole sector will do well. Polar has been the third best-performing fund manager since the beginning of last year. The investment case looks to be a call on whether the redemptions can be reversed, or at least slowed from their current pace. As of Monday M&G and Schroders who are leading the pack, have yet to report AuM for Sept-Dec.
Premier Miton AuM update
Like Impax, Premier Miton the small and micro-cap focused fund manager has a September year-end. They were showing significant net outflows of £666m in the Jul-Sept quarter, though redemptions have now slowed in the most recent Oct-Dec quarter to £338m.
Below is a table of fund redemptions by quarter and for FY Dec 2023. Note the deterioration at POLR versus the improvement at PMI.
NB PMI are going to buy Tellworth Investments which had £559m of AuM in September – that deal is expected to complete in the coming months. Despite the continued outflows, AuM rose +3% to £10.1bn due to helpful stockmarket conditions.
Valuation: The shares are trading on a PER of 11x Dec 2024F and the dividend yield is currently 9%. They had cash balances of £38m as of the end of September, representing 40% of the market cap.
Opinion: Fund manager Gervais Williams has done a good job at getting out in front of investors and explaining the case for small caps, for instance this interview from six months ago, where he talks about 18 stocks like Avacta, Polarean, Lords Group, Saietta Group, Supreme etc.
Ten years ago Gervais published a book called:The Future is Small: Why AIM will be the world’s best market beyond the credit boom. There’s even a foreword by Luke Johnson, talking about listing Patisserie Valerie in support of his arguments. History has not been kind. AIM is down -15% over the last decade versus the Nasdaq100 (ie large cap US tech) which is up almost 5x over the same period. I think it’s natural for portfolio managers to talk about their own book, but I’m more sceptical that meeting management or reading broker research gives the professionals an advantage.
Ashmore AuM update
Ashmore, the specialist Emerging Markets asset manager has a June year-end, so Sept-Dec is their Q2. They report in US dollars, which makes comparing market performance and outflows more complicated. I have just converted to GBP in the Excel tables above at a constant exchange rate of £/$ 1.27 to remove currency effects, but I’ll repeat their commentary in dollars.
They saw net outflows of $1.6bn, versus $2.9bn the previous quarter. Like the other asset managers they enjoyed the effects of positive market movements so AuM rose +4% on the previous quarter to $54bn. Around 85% of the funds are fixed income, and just $6.5bn is equities. If you think interest rates have peaked then they look well positioned to benefit.
Valuation: The shares are trading on 19x Jun 2024F and 2025F, so they’re on a premium rating compared to the rest of the sector. The dividend yield is 7.5%.
Opinion: Fixed income emerging market strikes me as an area where active fund managers ought to be able to add value versus a passive investment style. That said, AuM have fallen from $75bn a decade ago, so I wonder how much potential management have to grow their AuMs. I’ve not followed it closely enough to have a strong view. Feel free to share your thoughts on the “chat” function if you have a strong view.
Jupiter AuM update and Ben Whitmore departure
Finally, Jupiter, which has a December year-end, also announced a trading update. They saw £2.2bn of outflows in the 12m to 31 December, offset by £4.2bn positive markets movement. That leaves them with £52.2bn of AuM. The shares were off -16% on the morning of the RNS though, as they also announced the departure of Ben Whitmore.
He manages 4 separate funds (Special Situations £2.1bn, Income Trust £1.6bn, Global Value Unit Trust £1.0bn and Global Value SICAV £0.5bn) along with segregated mandates of £4.8bn. That equates to £10bn or just under 20% of group AuM. Presumably, not all of those assets will walk out the door when he leaves to set up a boutique, but the share price reaction is understandable if a good proportion does.
Valuation: The shares are trading on a PER 9x Dec 2024F, although the EPS could come down if we see significant outflows following Whitmore’s departure. On a PER basis MNG, PMI and LIO appear to be trading on lower valuations. Sharepad shows that the JUP dividend per share is forecast to be halved to 4p this year, which puts the shares on a forecast yield of 5%.
Below is a summary table of margin, ROCE and valuation measures. IPX is the only company in the sector forecast to grow turnover.
Opinion: Jupiter could represent a potential takeover target in a consolidating industry. The problem is that the share price has seen over 4 years of decline, the Jupiter strategy is undifferentiated and relies on star names rather than the process or area of expertise (cf Impax, Ashmore and Polar Capital that specialise in niche areas). JUP are likely to lose AuM in 2024, and the operational gearing inherent in the fund manager model is working against them, the share price is down almost -90% from a peak of over 600p at the start of 2018. Readers might try buying for a recovery, but to me, it feels like buying a melting ice cube.
My view is that investing is one area where amateurs using a tool like Sharepad enjoy an advantage over professionals. It would be a shame for amateurs to lose money backing the professionals at JUP, instead, we should be applying the lessons of Nick Train, Terry Smith and Buffett, but on a much smaller scale. That is: i) looking for consistently high RoCE businesses ii) with room to grow, meanwhile iii) doing nothing and keeping transaction costs down. The Jupiter investment case doesn’t fit that strategy, in my view.
Got some thoughts on this week’s commentary from Bruce? Share these in the SharePad “Weekly Market Commentary” chat. Login to SharePad – click on the chat icon in the top right – select or search for “Weekly Market Commentary” chat.
Weekly Market Commentary | 16/01/2024 | JUP, ASHM, IPX, POLR, PMI | Terry Smith and other historians
The FTSE 100 fell -1% to 7613 last week. The Nasdaq100 was up +3.2% and the S&P was up +1.8% in the last five trading days. The best-performing commodity was palm oil (CPO-MT) +4.5% while Brent crude rose +2.5%. I think food and energy prices are worth following at the moment, as rising commodity prices might undermine the case for interest rate cuts.
Last week Terry Smith published his annual performance update letter. The whole letter is worth reading. My feeling is that most professional fund managers don’t add value. Amateur investors would be better off buying low-cost index trackers and using Sharepad to invest in high-return smaller companies where we don’t suffer the liquidity constraints that the professionals have to deal with. However, a select few large-cap fund managers do seem to outperform over the years and are worth paying attention to (Terry Smith is one, Nick Train is another, Richard Oldfield also springs to mind). Interestingly, all of those mentioned studied history at university. My theory is that historians understand how to interpret sources and then form a narrative. They appreciate that a convincing narrative has to compete with other stories though. A good example is the question “What were the causes of the First World War?”* No one disputes the events, but there’s a lot of room to emphasise the significance of different events to form alternative narratives. That comfort with ambiguous events can be useful for fund managers who need to analyse the stories that drive corporate performance.
That said, you can’t expect an active fund manager, even a historian, to outperform every single year. Nick Train has struggled in recent years and last year Terry Smith underperformed the MSCI World Index by 5% which was up +17%. Terry’s longer-term track record since inception on 1st Nov 2010, is nearly 4% p.a. ahead of the fund’s benchmark index. This FT article suggests that over 90% of fund managers underperform the index over a decade, so Fundsmith’s performance since inception is exceptional.
Although I mainly use Sharepad for investing in equities, it is possible to look up data on funds and investment trusts. The GBP accumulation units for Fundsmith have the ticker 4FAAAD (in black in the chart below versus MSCI World ETF in red).
Richard built a Terry Smith filter in 2019 and wrote it up here. I’ve used the same filter but tweaked it to have a minimum RoCE of 20% and minimum operating margin of 15%. That gives four AIM stocks: Global Data, Judges Scientific, Keyword Studios and Quartix.
For FTSE All Share companies the list includes Halma, IHG, RELX, Moneysupermarket.com, Experian, and Sage.
Interestingly the last 3 companies were on the list when Richard ran the filter in 2019, and MONY and EXP were also in Phil’s Quality Share Filter which he wrote up last week. That’s not surprising, as both filters look for companies with consistently high returns.
This week I look at trading statements from active asset managers: Impax, Jupiter, Ashmore, Premier Miton and Polar Capital (the latter was The Quality Small Cap Investor’s pick for 2024). The table below shows that ASHM trades on 3.8% of AuM while JUP and PMI are the cheapest on this measure.
I suggested in October that redemptions and forced selling by professional fund managers could create a buying opportunity for anyone who doesn’t face those liquidity constraints in AIM shares. Since the end of October AIM has bounced +12%.
I’ve annualised the most recent Sept-Dec redemptions, and on this measure, POLR looks like it could be troubled if the current trend doesn’t reverse. Although Jupiter saw inflows in the final quarter of 2023 “star” fund manager Ben Whitmore is leaving, which knocked the shares -16% when it was announced last week.
Most of these active fund management companies aren’t run by historians, but given the fund redemptions and low valuation multiples, perhaps they should be.
Impax AM Q1 AuM Update
This environmental fund manager with a September year end announced a quarterly AuM update. I commented last week, that financial markets businesses like CMC and Plus500 looked to have seen a strong end to the year, whereas some consumer-facing retailers like JD Sports are still under pressure.
Market movements of £2.7bn, meant that AuM for the group was +4.6% in the quarter. That’s despite still seeing outflows in the most recent quarter (£948m in their listed equity business; on an annualised basis outflows are 10% of group AuM).
The fund manager put out a second RNS on the same day, to say that they had made a small (£350m AuM) acquisition in fixed income. That makes sense, currently £37bn of IPX’s group £39m AuM is in listed equities, so it makes sense for them to expand into fixed income and also private markets.
Valuation: Equity Development have left their forecasts unchanged, they are assuming AuM grows +10% to £41bn. That implies a PER of 17x Sept 2024F, dropping to 14x PER Sept 2025F. Equity Development points out that the fund manager Gresham House was acquired last year on a PER multiple of 37x.
Opinion: I own Impax and increased my position size in October at 372p per share; one of the attractions to me is the 20-year track record of environmental investing. That’s very hard to replicate, but it also means Impax with its ESG focus is less exposed to “star fund manager risk”.
Polar Capital Q3 AuM Update
Polar Capital has a March year-end, and so Sept-Dec last year is their Q3. They saw £1.1bn of outflows in the most recent quarter. That’s a significant acceleration versus earlier in 2023. In the management commentary, they saw redemptions in their Biotech, UK Value, Technology and European Opportunities. The positive spin they put on this is that redemptions were concentrated in terms of number of clients, as opposed to a wider trend. They also talk about a strong pipeline of client interest.
Below is a slide from their H1 presentation showing performance across the different funds. They have 12 1st quartile funds, which does look impressive. They don’t recreate the same chart for recent performance data but did say in November 40% of funds were outperforming their benchmark YTD. It’s also worth noting that they did close funds in 2023, so obviously those underperforming funds wouldn’t be included in the sample.
Despite the outflows, there was a large jump in performance fees (after paying staff their share) from £1.2m to £9.6m. That’s good news, but I think it would make sense to treat performance fees as less likely to recur than fees charged as a percentage of AuM.
Valuation: Equity Development raised forecasts, by +19% for FY Sept 2024F to 39.5p of EPS, while leaving the following year largely unchanged (showing a decline in EPS to 36.5p). That puts the shares on a PER of 11x and 12x the following year. Note to the high dividend yield 10%, but also that dividend is uncovered. Then again, they have net cash of £107m, which is just under a quarter of the market cap so they can afford to pay an uncovered dividend for several years.
Opinion: If 2024 is a strong year for markets and we see net inflows then the whole sector will do well. Polar has been the third best-performing fund manager since the beginning of last year. The investment case looks to be a call on whether the redemptions can be reversed, or at least slowed from their current pace. As of Monday M&G and Schroders who are leading the pack, have yet to report AuM for Sept-Dec.
Premier Miton AuM update
Like Impax, Premier Miton the small and micro-cap focused fund manager has a September year-end. They were showing significant net outflows of £666m in the Jul-Sept quarter, though redemptions have now slowed in the most recent Oct-Dec quarter to £338m.
Below is a table of fund redemptions by quarter and for FY Dec 2023. Note the deterioration at POLR versus the improvement at PMI.
NB PMI are going to buy Tellworth Investments which had £559m of AuM in September – that deal is expected to complete in the coming months. Despite the continued outflows, AuM rose +3% to £10.1bn due to helpful stockmarket conditions.
Valuation: The shares are trading on a PER of 11x Dec 2024F and the dividend yield is currently 9%. They had cash balances of £38m as of the end of September, representing 40% of the market cap.
Opinion: Fund manager Gervais Williams has done a good job at getting out in front of investors and explaining the case for small caps, for instance this interview from six months ago, where he talks about 18 stocks like Avacta, Polarean, Lords Group, Saietta Group, Supreme etc.
Ten years ago Gervais published a book called: The Future is Small: Why AIM will be the world’s best market beyond the credit boom. There’s even a foreword by Luke Johnson, talking about listing Patisserie Valerie in support of his arguments. History has not been kind. AIM is down -15% over the last decade versus the Nasdaq100 (ie large cap US tech) which is up almost 5x over the same period. I think it’s natural for portfolio managers to talk about their own book, but I’m more sceptical that meeting management or reading broker research gives the professionals an advantage.
Ashmore AuM update
Ashmore, the specialist Emerging Markets asset manager has a June year-end, so Sept-Dec is their Q2. They report in US dollars, which makes comparing market performance and outflows more complicated. I have just converted to GBP in the Excel tables above at a constant exchange rate of £/$ 1.27 to remove currency effects, but I’ll repeat their commentary in dollars.
They saw net outflows of $1.6bn, versus $2.9bn the previous quarter. Like the other asset managers they enjoyed the effects of positive market movements so AuM rose +4% on the previous quarter to $54bn. Around 85% of the funds are fixed income, and just $6.5bn is equities. If you think interest rates have peaked then they look well positioned to benefit.
Valuation: The shares are trading on 19x Jun 2024F and 2025F, so they’re on a premium rating compared to the rest of the sector. The dividend yield is 7.5%.
Opinion: Fixed income emerging market strikes me as an area where active fund managers ought to be able to add value versus a passive investment style. That said, AuM have fallen from $75bn a decade ago, so I wonder how much potential management have to grow their AuMs. I’ve not followed it closely enough to have a strong view. Feel free to share your thoughts on the “chat” function if you have a strong view.
Jupiter AuM update and Ben Whitmore departure
Finally, Jupiter, which has a December year-end, also announced a trading update. They saw £2.2bn of outflows in the 12m to 31 December, offset by £4.2bn positive markets movement. That leaves them with £52.2bn of AuM. The shares were off -16% on the morning of the RNS though, as they also announced the departure of Ben Whitmore.
He manages 4 separate funds (Special Situations £2.1bn, Income Trust £1.6bn, Global Value Unit Trust £1.0bn and Global Value SICAV £0.5bn) along with segregated mandates of £4.8bn. That equates to £10bn or just under 20% of group AuM. Presumably, not all of those assets will walk out the door when he leaves to set up a boutique, but the share price reaction is understandable if a good proportion does.
Jupiter has hired replacement fund managers to manage some of his funds, Alex Savvides (ex JO Hambro), Adrian Gosden and Chris Morrison (ex GAM). I haven’t heard of any of these names before. FTAlphaville has been banging the drum on index tracking and eating active management’s lunch for a while now, and they seem to be rather enjoying themselves in this post about Whitmore’s departure.
Valuation: The shares are trading on a PER 9x Dec 2024F, although the EPS could come down if we see significant outflows following Whitmore’s departure. On a PER basis MNG, PMI and LIO appear to be trading on lower valuations. Sharepad shows that the JUP dividend per share is forecast to be halved to 4p this year, which puts the shares on a forecast yield of 5%.
Below is a summary table of margin, ROCE and valuation measures. IPX is the only company in the sector forecast to grow turnover.
Opinion: Jupiter could represent a potential takeover target in a consolidating industry. The problem is that the share price has seen over 4 years of decline, the Jupiter strategy is undifferentiated and relies on star names rather than the process or area of expertise (cf Impax, Ashmore and Polar Capital that specialise in niche areas). JUP are likely to lose AuM in 2024, and the operational gearing inherent in the fund manager model is working against them, the share price is down almost -90% from a peak of over 600p at the start of 2018. Readers might try buying for a recovery, but to me, it feels like buying a melting ice cube.
My view is that investing is one area where amateurs using a tool like Sharepad enjoy an advantage over professionals. It would be a shame for amateurs to lose money backing the professionals at JUP, instead, we should be applying the lessons of Nick Train, Terry Smith and Buffett, but on a much smaller scale. That is: i) looking for consistently high RoCE businesses ii) with room to grow, meanwhile iii) doing nothing and keeping transaction costs down. The Jupiter investment case doesn’t fit that strategy, in my view.
Notes
*On the causes of the First World War, Churchill blamed the build-up of the German army and naval power. Robert Graves, the war poet, thought all overseas wars were trade wars. A slightly different theory, from comedian Rob Newman, is the Berlin-Baghdad railway and the importance of oil. Another suggestion, from Tom Holland, is that in 1910 the Kaiser wore inappropriate shoes on the Royal Yacht at Cowes Week and felt humiliated when his British relatives laughed at him. Then there’s the Blackadder explanation for WW1, which actually sounds quite credible.
Bruce Packard
brucepackard.com
Got some thoughts on this week’s commentary from Bruce? Share these in the SharePad “Weekly Market Commentary” chat. Login to SharePad – click on the chat icon in the top right – select or search for “Weekly Market Commentary” chat.