Jupiter’s Rhys Petheram and FE Alpha Manager Alastair Gunn (pictured) launched their new Jupiter Enhanced Distribution on Monday. 
The mixed asset unit trust aims to provide investors with a monthly income as well as maintaining capital growth over the longer term.
Jupiter Enhanced Income has been created as a halfway point between their low-risk Jupiter Distribution fund, which resides in the IA Mixed Investment 0%-35% Shares sector and their higher risk Jupiter High Income fund, which is in the IA Mixed Investment 40%-85% Shares sector.
“The new fund is going to sit in between these along the risk and the income spectrum so it has more equities and more high-yield bonds [than Jupiter Distribution] - the starting point is around approximately 45 per cent equities and about 15 per cent high-yield bonds,” Petheram said.
“That’s the idea – we’re completing the range in terms of risk spectrum and income. It depends on the risk preference of the end investor, but also whether their risk preferences change over time so it allows them to move up and down.”
“It’s the same managers and exactly the same investment process and the holdings are very similar across all the funds as well, it changes in asset allocation.”
Gunn and Petheram have a decent track record of outperformance, nearly doubling the gains of their combined peer group composites since they began running money together in July 2010.
Performance of managers versus peers since July 2010
Source: FE Analytics
Both managers co-ordinate their macroeconomic views in terms of the direction of the economy both domestically and globally, and align their views on headwinds and tailwinds in the markets.
The fund is also run on a bottom-up basis and Petheram and Gunn will discuss increasing or reducing exposure to holdings across the asset classes, even though Petheram specialises in fixed income and Gunn specialises in equities.
“We’re both very much involved in trying to find the best value across the entire capital structure be it equity or debt, and sometimes that means owning both or neither or looking at private companies in a peer universe rather than quoted ones,” Gunn said.
“We think we’ve added a lot of value that way but, at the same time, our incentivisation tells you what you need to know which is that we’re both remunerated for managing our units against our benchmarks and outperforming, and then we’re remunerated for the whole fund outperforming.”
“So we make the right decisions for the fund overall but we also have to make it work for us from the bottom up on an equity basis and on a bond basis.”
The split between stocks and shares will be flexible but the fund sits in the IA Mixed Investment 20%-60% Shares sector, and the managers will also hold cash if they deem it to be appropriate.
It is this split between assets, alongside a more cautious stance on bonds and a heavier reliance on equities for yield that the managers believe will make their yield target of 4 per cent, which they aim to grow over time, possible.
They also believe that their blend of assets means that the fund won’t incur undue capital risk, as the bond exposure should provide regular income and offer stability in weaker markets while the equities will bolster long-term capital growth.
“Our bias is more towards the lower risk bonds. I do have high yield bonds in the fund – in this fund there is that 15 per cent but that’s actually quite low for what is a higher income product. I would describe ourselves as having a cautious position on high yield,” Petheram explained.
“The reason is that when you look at the volatility, high yield has performed very well over quite an extended period now - over the past six years since the crisis it’s gone up in quite a steady fashion, so volatility and risk-adjusted returns look great on that basis.”
Performance of sectors over 6yrs
Source: FE Analytics
“We don’t just look at volatility when looking at risk though, we look at drawdown, and I think that’s where the way we look at valuation differs. I want more reward for that drawdown risk in high yield, so we’re a bit more conservative. We see value and income opportunities in the equity side of the portfolio.”
The new fund won’t own any bank bonds and will instead focus on lower risk investment-grade credits. While Petheram admits that moderate duration names aren’t going to shoot the lights out in term of yield, they are adding vital stability and keeping the fund in line with its risk profile.
In contrast, the largest equity weighting of the fund is in financials at approximately 24 per cent and a substantial amount of this is allocated to banks.
Gunn says the team are continuing to increase their exposure on a domestic level because of the impending interest rate rise and because he believes the UK is coming to the end of tightening regulation.
“I’ve consistently been expecting the Bank of England to raise rates much later than the market thinks it’s going to happen,” the manager explained.
“I’m pretty certain they’re not going up next month, I think it will probably be the first quarter of next year with the way the sterling is behaving and with China. But I do think rates are going up and banks are obviously going to be a beneficiary of that.”
“I think we’re getting close to the end point in terms of tightening regulation, which means the outlook for dividends is going to start to look a lot better.”
One area of the market that the fund will completely avoid is property due to expensive valuations, lacklustre yields on fully-distributed earnings and because the value of their underlying assets now peaks beyond what the stocks achieved on average in 2007, according to Gunn.
Performance of sector over 10yrs
Source: FE Analytics
“The problem is, in the early 90s you saw foreign investors pile into UK and particularly in London property and they made massive gains, their timing was perfect,” he said.
“They also made a big currency profit and the same thing is happening again. If you had invested three or four years ago you would have made a massive property profit and you’re making a massive currency profit.”
“If all those investors start looking for the door at the same time, your marginal bias will disappear as property is incredibly illiquid, and the equities are being valued at all-time highs relative to history. I just think there’s no value there.”
However, Petheram and Gunn do have holdings in house-builders in the portfolio as they both believe that houses in the UK are in desperately short supply.
“There’s no competition in the land buying market and these companies are making record margins, and the risk to house price inflation and markets from here is to the upside,” Gunn continued.
“These are companies that are trading on 11/12x earnings and they’ve got very strong dividend growth. I would say that house builders and banks are the two most interesting areas of the market in terms of dividend growth going forward.”
The fund’s regular monthly income pay-out combined with its flexible diversification across asset classes could also make Jupiter Enhanced Income relevant to people planning for or moving into retirement, according to the managers.
“We’ve got an established track record already. Yes it’s a new fund but we’ve been running the other Jupiter funds for five years,” Petheram said.
“It pays a monthly distribution – 4 per cent is actually pretty healthy relative to cash rates, and it’s transparent in terms of what the risks are and transparent in terms of where the income is coming from.”
While there is of course no data on the fund as of yet, the duo’s £584m Jupiter Distribution fund has outperformed its sector average by 18.66 percentage points over the mangers’ tenure, providing a total return of 43.55 per cent.
Performance of fund vs sector over management tenure
Source: FE Analytics
Jupiter Distribution sits on the FE Select 100 as the FE Research team rate the duo highly.
“The fixed income portion is managed by Petheram in order to protect investor capital while the equity portfolio should provide some growth. Investors should profit from this situation as the two co-managers are young and talented individuals in their respective areas,” the team said.
The fund has four FE crown, yields 3.1 per cent and has a clean ongoing charges figure (OCF) of 0.64 per cent. Jupiter High Income has also outperformed over their tenure, returning 18.71 per cent and outperforming its sector average and benchmark by 7.83 and 9.37 percentage points respectively.
The £538m fund, which also has four FE crowns, yields 4 per cent and has a clean OCF of 1.05 per cent.