Managers who focus on downside risk as much as the upside and are able to perform across all market conditions should be given top priority across investors’ portfolios, according to the Jupiter Independent Funds team. 
As such, they favour the likes of Mark Barnett, Neil Woodford, Terry Smith and Ben Whitmore and believe they will continue to generate stellar returns across the Jupiter Merlin portfolios for years to come.
“The hardest thing I find when selecting fund managers is to be convinced that they have a strategy which is robust enough throughout all points of an economic cycle,” FE Alpha Manager John Chatfeild-Roberts (pictured) said.
“We’re not wanting to buy fund managers that are going to do well in a particular environment and think we’re clever enough to sell them and buy one that is going to do really well in the next environment.
“We want people who have an investment strategy that enables the investors to get from point A to point B with greater spending power than when they started.
“To my mind, it is all about increasing investors’ net wealth and that’s why the Ben Whitmores, the Terry Smiths, the James Findlays, the Mark Barnetts and the Neil Woodfords are heavily impregnated in our portfolios and that’s what makes our portfolios very concentrated relative to our competitors.”
It is commonplace for the Jupiter Independent Funds team to allocate between 50 to 60 per cent of its portfolios to its top five holdings.
When it comes to selecting the right managers for each mandate, the team looks for high-conviction investors who “hate losing money” and place greater emphasis on protecting on the downside than many of their peers.
Its investment process has clearly stood the funds in good stead, as Chatfeild-Roberts and fellow FE Alpha Manager Algy Smith-Maxwell have comfortably outperformed their respective peer group composites since the turn of the millennium (as shown in the graph below).
Performance of managers versus peer group composites since 2000
Source: FE Analytics
The managers, who head up the Merlin portfolio range alongside David Lewis and Amanda Sillars, said a key part of their process is not to rule out any managers that have inconsistent views with other managers within the portfolio.
“In a funny sort of way there is no right answer, but we’re trying to find the seriously good people, there just aren’t that many of them out there. They tend to have longevity,” Chatfeild-Roberts explained.
“We’re always trying to find the good new [managers]. We bought Hugh Yarrow and Ben Peters’ Evenlode Income about three years ago. It was a £50m fund at the time, it now has £1bn in it. We think that team will be good to go for multiple years. We hope we have somebody who is the same calibre as Anthony Bolton and Neil Woodford.
“We are always on the lookout for the next generation but there just aren’t that many. You have to keep your ears close to the ground and be patient.”
Given the high concentration of the Jupiter Merlin portfolios, those playing the devil’s advocate could argue that there is a greater chance of excess stock concentration within the funds.
However, the managers pointed out that the position sizes they adopt are a far more important factor.
“What we’re very careful of doing is not having a position size in the portfolio to a manager who, if he goes through a difficult period, bounces us out because it’s become too big-a-bet in the portfolio,” Chatfeild-Roberts reasoned. “It is sizing of the individual manager weighting in the portfolio which is much more important to me than whether I have managers who are doing things in a similar way.
“I could say that Evenlode does some things in a similar way to Terry Smith – it’s not identical but they do rhyme. I don’t mind that.”
That said, the team does blend these managers with those who have very different investment processes.
For instance, Smith-Maxwell said Terry Smith’s focus on high-quality, high-growth stocks is complemented by ben Whitmore’s value approach to stock selection.
“They do things in a completely different way. I don’t know who is going to do better on a five- or 10-year view; I think they will both do incredibly well, but they will get there via very different paths,” he said.
Performance of managers vs benchmarks since start of data
Source: FE Analytics
Another example of managers the team believes dovetail well are Jupiter’s Ariel Bezalel and the managers at TwentyFour Asset Management.
“On the fixed interest side we have Ariel Bezalel who runs the strategic and dynamic funds. He’s quite cautious, he has a barbell of pretty defensive sovereign bonds and emerging market exposures in there,” co-manager Lewis said.
“We blend this in our income fund with TwentyFour, which is primarily Europe and UK-focused. They both have pretty dissimilar views on various areas but both of them are using their individual skill sets, which in Ariel’s case is using the big analyst team around him, using his macro insights and dipping into these sovereign bonds.
“This is not the case at TwentyFour. It’s a lot more about looking specifically at individual credits. The blend of them has been really good. Holding the pair of them will grind down volatility.”
In terms of their European equity exposure, the team holds vehicles managed by James Sym – who heads up the Schroder European Alpha Income and Alpha Plus funds – and FE Alpha manager Richard Pease, who runs the five crown-rated FP CRUX European Special Situations fund alongside James Milne.
“They are growth and value, so have completely different styles,” Smith-Maxwell explained.
“One has a large exposure to banks at the moment, for instance, and the other fund manager is much more growth-focused.”
Overall though, managers are chosen by the team based on their individual merits and their ability to perform well across the market cycle.
One manager they have particularly high conviction in is Terry Smith, who runs the £10.3bn Fundsmith Equity portfolio.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“Terry Smith is a very good example of the way we think and what we’re prepared to do,” Chatfeild-Roberts said. “I believe we are pretty much the only institutional investor to have money with Terry Smith, certainly in this country.
“He has been an original thinker for many years, but he runs a global portfolio. So, if you want to micromanage your asset allocation or your sector allocation, you’re going to find it a problem with Terry Smith because he follows his conviction and it’s going to muck up whatever minutiae you were aiming for.
“He does do things in a very different way and we invest in people. We think he is a remarkable individual, he really cares. He has a huge amount of money in his own fund and that’s the sort of person that we really like. He will generate some really attractive returns over the next 10 years.”