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Alpha Manager Nichols: ‘Chief executives should suffer alongside investors when shares fall’ | Trustnet Skip to the content

Alpha Manager Nichols: ‘Chief executives should suffer alongside investors when shares fall’

28 January 2022

The co-manager of the Jupiter European fund explains how the fund has changed under his tenure and why he is fighting against CEO remuneration.

By Jonathan Jones,

Editor, Trustnet

This year has got off to a difficult start for some of the best funds of the past decade. Growth portfolios, which have ridden the wave of low interest rates and low inflation since the global financial crisis, have been knocked in January as investors have indiscriminately sold off high-growth stocks.

Jupiter European has been one such fund to take a hit. Despite a top-quartile return in 2021 of 19.3%, the fund has lost 14.2% this year already, more than double the losses of the IA Europe ex UK sector and FTSE World Europe ex UK benchmark.

It means that since FE fundinfo Alpha Managers Mark Heslop and Mark Nichols took charge of the fund – replacing Alexander Darwall in October 2019 – it has made 15.2%, a bottom-quartile effort. Yet turning around a fund is not a quick process.

Below, Nichols tells Trustnet how the fund has changed since Darwall was in charge, why he sold video game giant Ubisoft at a 35% loss and why he has taken up the fight against chief executive pay packages.

Total return of fund vs sector and benchmark since the managers’ start date

 

Source: FE Analytics

 

What is your process?

We are bottom-up, fundamental stock pickers that are benchmark agnostic. The approach is about finding businesses that have the potential to be worth significantly more in the future in a relatively predictable way.

We seek companies that generate an attractive spread of returns on capital and have the ability to sustain that through some sort of competitive advantage. We also want those businesses to be managed by teams with a proven track record.

The aim is to get more winners than losers, but you have to accept there will be some losers.

 

Why should investors pick your fund?

There is length of track record experience behind it. The process has been consistently deployed by an experienced team that have done this for a long time – both prior to Jupiter and since we arrived.

Being concentrated and high conviction are features that drive the risk up, but we tend to view risk as financial loss. When we think about what an investor wants to achieve when they buy a fund, they want to grow their initial investment but also do not want to be facing losses.

 

What are the biggest changes to the fund since you took charge?

Putting the stock changes to one side, the biggest bit that people don’t see is putting the team in place and getting it to function properly. The fund now has a team of five investors sitting behind it and is a co-managed product, although it took 12 to 18 months to get it working smoothly.

Our impression of how it was done before was that you had one individual who dominated the portfolio and stock selection, so this shift to a team-based approach working together has been our big day-to-day focus.

 

What has gone wrong in 2022 so far?

We are not trading excessively or changing anything around our approach. We are also not seeing any change in corporate fundamentals: some companies have communicated with the market about how last year finished and the outlook for this year. Broadly they are all in-line with our expectations or have been a bit better.

What has shifted is this big macroeconomic narrative around inflation, interest rates and central bank policy. The market is talking about more imminent base rate hikes in the US.

The market’s response thus far has been to compress valuation multiples. Anything with longer-dated growth and a higher earnings multiple has been sold down. So the best-performing sectors in Europe have been oil, mining and banks and the worst have been technology and healthcare.

It seems that it has been relatively indiscriminate and the dispersion within sectors has been low, but the dispersion between sectors has been high.

When you have a process that focuses on companies with structural growth, we tend to be overweight things in technology, media, industrials and consumer discretionary.

Total return of fund vs sector and benchmark in 2022

 

Source: FE Analytics

 

What were your best and worst stocks in 2021?

There are quite a few we could pick but NovoNordisk stands out as a big winner. It gained proof of concept on a new weight-loss treatment that was previously being used for diabetes, which has improved its growth potential. Shares rose 73% in Danish krona terms or 61% in sterling over the calendar year.

On the flipside there were a few cyclical stocks that fell, but the one that was structural was video game developer Ubisoft. While people might have been playing more video games at home in the lockdowns it was harder to develop new titles so the launch pipeline was disrupted.

The business has been spending more money trying to grow in the free-to-play market, following what Activision has done with the Call of Duty mobile game. We weren’t assuming cash would be invested in this area in the volume that it has been and returns are harder to predict in mobile gaming, so the investment case was different from when we first bought.

Shares were down 49% in pound terms over the year. We exited the position in stages, but the final one was when shares were down around 35%.

 

What is the most exciting stock in the portfolio?

Adidas. We have been long-term holders and everyone thinks they know what the firm stands for as a brand. The investment case is structural with the shift to online sales as this gives it more control of the brand and captures more intellectual property because it is not giving it away to third-party retailers. This gives the company more control over pricing as well.

A cyclical reason for optimism is that it has had some issues in China where the Western brands have done less well, but whether it improves or not, when it starts lapping the weak comparisons there should be growth.

 

Do you incorporate environmental, social and governance in the fund?

We have engaged with corporates at management and executive board levels for a long time, whether it be on issues such as gender balance or emissions.

In the past we have looked at it as a cost of doing business – how much they must invest to offset any negative impacts they might have – but increasingly it has become more balanced between understanding the risks but also the opportunity presented by the best-in-class companies in these issues.

We engage with companies and are active rather than activist, and prove this through our voting record.

What have you voted against recently?

We regularly vote against the companies that we are invested in. The most common thing we have tended to vote against recently is executive pay.

We have been through a period where workforces and the average employee has faced a tougher period.

Chief executives or chief financial officers are more tied into performance-based pay. When shares and profits fall a lot in a short period of time it has an outsized impact on performance-related pay and that is one of the reasons we like it. It ties management teams into the outcomes that investors and other stakeholders receive from the business.

That has presented a challenge for boards. If you have an excellent CEO in a disruptive sector, how do you pay them enough to be competitive against alternatives.

There is this tension between a desire to be competitive on pay, versus demand from investors that they suffer alongside stakeholders.

Where companies have tried to smooth that at the benefit of the CEO, i.e. by changing compensation, we do not think that is appropriate.

It is a hot topic due to the pandemic. Longer-term there is a drift higher in executive compensation and we are keen that as that happens, it is highly aligned to investors. If you start putting through significant increases in pensions or salary increases, where we don’t think it is justified or is out of line with the average employee, we want to put our foot down.

 

What do you do outside of fund management?

As anyone with young children will tell you, hobbies go out of the window pretty quickly, but I like to read. The last book I read was Will Smith’s autobiography, which was an interesting insight into what drives highly successful people – through a very specific lens of course.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.