FE Analytics shows the £4.5bn Jupiter Merlin Income Portfolio has returned 2.21 per cent over the past 12 months, underperforming the 4.10 per cent gain of its average peer and ranking it 114 out of 134 IMA Mixed Investment 20%-60% constituents.
However the fund – which is one of the most popular with investors and advisers looking for a one-stop-shop for diversification – has steadily ticked up the rankings more recently. It is third quartile over six months, second quartile over three months and, while this is a very short time frame, top quartile over one month.
Performance of fund vs sector over 1yr
Source: FE Analytics
Chatfeild-Roberts, who manages Jupiter’s Merlin fund of funds range with fellow FE Alpha Managers Algy Smith-Maxwell and Peter Lawery, told FE Trustnet that one of the biggest reasons for the underperformance came from the dollar’s weakness at the start of 2014. The fund remains positioned for a stronger dollar, however.
Sterling was trading at more than $1.70 in early July but dropped as low as $1.57 today due to the shift in interest rates expectations in both the US and UK.
“The dollar was relatively weak against sterling so most of the underperformance you can see on an annual basis occurred in those months,” he explained. “Fundamentally the US economy is the strongest in the world and therefore the US dollar should be the strongest currency.”
One way this affected Jupiter Merlin Income was through the portfolio’s 11 per cent stake in M&G Global Dividend, which has around 50 per cent in the US. Stuart Rhodes’ fund has also had a tough year, currently sitting in the fourth quartile. However, the dollar’s recent strength against sterling has supported the Jupiter fund’s short-term outperformance. Analysts expect the greenback to continue to strengthen going forwards, with Capital Economics now forecasting sterling to weaken to £1.55 by the end of the year and $1.50 by 2015’s close.
Chatfeild-Roberts also says the surprisingly strong performance of developed market government bonds over most of 2014 has held back returns but, again, this is starting to ease and benefit the fund.
The Jupiter team is positive on equities over bonds, with the portfolio holding just 32.80 per cent in fixed-income funds. It favours flexible strategic bond funds such as GLG Strategic Bond and Jupiter Strategic Bond, as well as corporate bond vehicles such as M&G Strategic Corporate Bond and Kames High Yield Bond.
Jupiter Merlin Income has been avoiding Western government bonds for some time, seeing a lack of value in the asset class.
Chatfeild-Roberts said: “We just do not think [gilts] have any real long-term value – lending the government money at 2 per cent for 10 years doesn’t seem to me to be maximising opportunities.”
This long-term call has hurt returns over the year so far. FE Analytics shows the IMA UK Index-Linked Gilts sector average has gained 7.93 per cent while IMA UK Gilts is up 6.49 per cent. By contrast, both the IMA UK All Companies and UK Equity Income sectors have lost money.
Performance of sectors over year to date
Source: FE Analytics
However, equity sectors have started to outperform the government bond peer groups over more recent time frames and few investors are expecting developed sovereign debt to perform as strongly in 2015 as it has this year. Chatfeild-Roberts sticks by his view that value will be found in stocks not government bonds.
The manager highlighted a number of other factors – such as exposure to Asian equities and a preference for large-cap focused UK equity income funds over their mid-cap biased peers – that contributed to underperformance at the start of the year but have since reversed and aided the recent turnaround.
“Everything that we had that was a hindrance has now become a help. If you wait long enough in fund management things tend to come back to you,” Chatfeild-Roberts said.
The manager doesn’t see a need to change the fund’s allocation in any dramatic way, sticking with the long-term themes the portfolio is built around. This year has seen some additions though, such as Neil Woodford’s new fund, and the team has also bought a property fund – Mayfair Capital Commercial Property Trust – for the first time in years.
“I’m feeling pretty good about where the fund is currently positioned. Where the markets go in the short-term I can’t say,” the manager continued.
“There has been a bull market in shares for some time and you might expect to see a bit of a pause. You can’t expect markets to keep going up in a straight line, but I think we’re positioned in the right way.”
Jupiter Merlin Income has built up a strong long-term track record, returning 96.27 per cent over 10 years against the sector’s 58.23 per cent average gain. This makes it the third best performing fund out of its 32 peers with a long enough track record.
Performance of fund vs sector over 10yrs
Source: FE Analytics
FE Analytics also shows the fund has been first quartile for alpha generation over the past decade, and it’s also had a lower maximum drawdown – which measures the loss an investor would have seen if they bought at the peak and sold at the trough.
The FE Research team, which includes Jupiter Merlin Income in its Select 100 list of preferred funds, says the Merlin team’s strategy of seeking to profit from long-term investment themes while selecting managers with an ability to add value in their area of expertise has proven “especially effective”.
It’s also highly regarded by FE strategic partner Square Mile Investment Research & Consulting, which gives the fund its top ‘AAA’ rating in its Academy of Funds.
“The managers have proven their ability to assess the macro environment, and build well-constructed portfolios. Their approach is pragmatic, and their asset allocation and fund selection will be flexed according to the opportunities,” the group said.
“We see this as a strong offering for investors who want a fund of funds managed by an experienced, proven team with a well-considered investment approach.”
Jupiter Merlin Income has ongoing charges of 1.60 per cent and currently yields 2.90 per cent.
