James Baxter, Founder
In Nick’s absence this week I will take a less expert look at what is driving the performance of two very different funds, Titan’s Hybrid Capital Fund and Jupiter’s Asian Income Fund, that have caught my eye recently.
It has been a tough couple of weeks for portfolios handing back some of the early May gains but we are still nicely positive for the year to date as we approach the halfway mark. Our Multi-asset Balanced portfolio is up about 4.4% net of all fees so far in 2024.
Two main themes for 2024 have been the lack of interest rate drops and the continued obession with all things AI in equity markets. Higher rates are benefiting the Hybrid Capital fund and the Asian Income fund has profited from AI, but outside the US.
Titan Hybrid Capital Fund
Those who look at fund databases online will note that Tideway still appears in the name of this fund as the Irish UCITs fund umbrella (now run by Waystone who bought Link’s business after the Woodford debacle) still bears our name. In practice it has been running independently of Tideway since 2020. It is, however, still run by ex Tideway shareholder Peter Doherty, now with an 8 year track record.
We took quite a bit of flack from some of our clients for holding this fund in 2022 which saw it suffer ‘paper losses’ of around 20%. It is not what you want to see from a bond fund, but 2022 was an extraordinary year for bonds with the average UK Gilt fund down 30% in the same period. I say paper losses, because this was all about interest rate increases and market pricing, we could see that none of the bonds held by the fund had defaulted. The bonds just had their secondary market prices marked down heavily as rates went up. We could see there would be a recovery and we know Peter well enough to know he would make hay in a rising market. He has, and this fund, one of our largest holdings, has been a big contributor to our recent performance.
Peter posted on LinkedIn yesterday that it had been the best day for the fund this year making 0.9% in a day. How can that be for a bond fund? Is it legal I hear you ask, or has he gone completely off piste?
The answers are yes it is legal and, no he is still very much inline with the fund mandate. The fund is taking advantage of some well signalled changes to insurance company regulatory capital requirements. In this case UK insurer RSA Insurance Group had bought back some of its old bonds which will no longer qualify for regulatory capital in 2026. The buy back was 16% above the previous days secondary market value. The fund holds a few of these bonds, they pay great interest whilst we wait and at some point all these bonds will need to be bought back. So we are getting capital gains on top of very healthy bond interest. The fund is still yielding over 8% on a forward looking basis, so we have confidence these returns will continue. Higher interest rates for longer is actually great for this fund.
As we often say to clients, good wealth management is about not suffering big permanent, or long term losses. A 20% loss requires a 25% gain to fully recover which the Hybrid Capital fund has made in under 2 years since the low point on October 2022. In real terms of course inflation is up around 20% since the highpoint at the end of 2021, so it is going to take a few more years for investors who bought in at the peak to have real positive returns after inflation, but with inflation now sub 3% we are very confident they will get there in a couple more years.
Not so for the hapless Woodford fund investors who crystalised some 40% losses. Nor the long term gilt fund investor from 2021. Gilt funds are still down 20% in nominal terms, 40% in real terms and with forward returns of only 1-2% above inflation it’s going to be a couple of decades for these investors to get their money back in real terms. I’m pleased to say we have avoided both of these very popular investments.
There was around £10bn in the Woodford fund at its peak before its collpase, suggesting as much as £4bn permanent losses.
God forbid how much money has been lost in the £1.8trn of UK Defined Benefit Pension funds, where a good portion of that money had been allocated to gilts and high grade corporate bonds even as rates collapsed. According to a report by consultants Mercers in 2022 some 57% of this, around £1trn was invested in bonds by 2021, up from 31% in 2003.
Sources:Source Mercer – DB Asset Allocation Trends in the UK 2022
So that’s about £400bn of real capital losses after inflation. The biggest asset allocation mistake in UK fund management history?
Of course, DB scheme liabilities have shrunk by 40%, so, in the end the schemes and their advisers have quietly got away with it and even bragging about how they are in surplus again. But just think of all that value destroyed by UK PLCs and their pension scheme advisers! (Rant over!)
Jupiter Asian Income
This fund run by the very experienced Jason Pidcock and Sam Konrad, has also had a great recent run of performance.
Contributing to this performance the fund has:
- Stayed away from China, save for an exposure to Taiwan
- Followed the Semi conducter/ AI supply chain and tech
- Been big in Australia and Gold
We mentioned Artemis Global Income in the last update as a fund that had outperformed the US indices recently with much lower US exposure than the world index. This Jupiter fund has kept up with the average global equity manager over the last 8 years without any significant US exposure. In doing so it has outperformed its peer group of funds by around 50% in the last 2 years. And it has done all this whilst paying a decent dividend income.
Looking at the funds top holdings you can see why it has been flying:
FE Analytics, Holdings 31 May 2024, Bloomberg, Metrics 14 June 2024
Hon Hai Precision Industry, often known as Foxconn, is a £65bn electronics buiness, making phones, computers and TVs but also focused on AI, semiconductors and next generation comunication employing just over three quarters of a million people. Its shares are up a whopping 90% year to date. Taiwan Semiconductor Manufacturing (TSCM) is the world’s largest chip manufacturer, has a customer list to die for, including Nvidia, and is up 75% year to date. Mediatek Inc also makes chips and is up 40% year to date. These top three stocks will have dominated returns, just as the big caps have done in the US.
Our research team met with the Jupiter team recently who conveyed two key aspects in respect of their portfolio and ongoing management:
- They are acutely aware of the political risks surrounding Taiwan and China and noted their positions were very liquid and that they were ready and willing to disinvest from the region in any kind of conflict escalation. Meanwhile, much of the world’s tech still relies heavily on these Taiwanese businesses.
- They are razor focused on AI, not just on ‘the picks and shovels’ tech business who are getting the initial boosts in share values, but on the cost savings and efficiencies it can bring in other wider sectors.
Overall, we remain impressed by their process, approach and enviable long term track record.
I note the once mighty Jupiter Fund Management has been through a torrid seven years with the business valuation dropping from £3.2bn to just £383m – it’s lost almost 90% of its value! Like many active managers it has suffered horribly from the shift to passive management and sits on the highly unpopular UK stock market.
But like other UK stocks, this price collapse is starting to attract interest from some high conviction contrarian managers. South African manager Steve Peche who runs his own Ranmore investment fund (we don’t invest in this fund) noted in Citywire today:
‘Jupiter generated £90m of free cashflow over the past year but has a market cap of only £500m, with half of that in cash,’ said Peche. ‘That’s why it’s attractive value, which could be unlocked if management commits to returning surplus capital and future free cashflow to shareholders.’
Right now, you would have to say Steve looks like he is trying to catch a falling knife! But worth keeping an eye on!
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