Running a global fund provides the perfect opportunity to run a high-conviction, concentrated portfolio, according to Jupiter’s Stephen Mitchell (pictured), who has taken steps to make sure his fund does not have too many holdings. 
The manager took over the Jupiter Global Managed fund in March this year from Simon Somerville, having previously run Old Mutual Japanese Equity and the JP Morgan Japanese investment trust.
Over the last few months, the £288m fund has seen a drastic overhaul which has involved reducing the number of holdings from 300 to just 50.
The move comes alongside Mitchell’s simultaneous appointment as head of strategy and global equities, and the subsequent construction of a global team.
“Jupiter had some global products but they didn’t have a dedicated global team, so I’ve come in to head that up, put it together and build a product line-up,” he said.
“There are various funds in the global line-up but the two biggest ones are Global Managed, which I’m running and we’re going to rename, and the Global Financials funds.”
“We’ve changed things quite a lot. Global Managed, because it didn’t have a global desk, previously took the US portfolio, the European portfolio, the UK portfolio etcetera, and they basically did an asset allocation on size between the different pools, so the portfolio had about 300 stocks.”
“To be honest, performance numbers were okay but it wasn’t a marketable process. What we’ve done is reduce the number of stocks from 300 down to 50 or less, so we will hold 35 to 50 at any one time.”
Mitchell has divided the new global team’s focus into two parts – quality companies that are the best in their region and in a preferable sector, and companies that pay an attractive dividend.
“We are investing primarily in dividend-paying companies, partly because it makes sense, partly because clients still want income, and we can deliver that,” he pointed out.
“That’s what we’ve spent the last few months doing – focusing it down on the right companies, so it’s long-term investing. If you’ve got these quality companies that have got long-term growth opportunities you don’t want to be turning them over.”
“We’re pretty much through that process of re-organising it, and you can look at the parameters of the fund and you can see that the return on equity [ROE] has gone up, the dividend yield has gone up, so all the metrics have gone the right way. We believe that, over time, that we will deliver better returns through ROE companies, which deliver higher returns for shareholders.”
The search for dividend-paying companies is often associated with income funds, but Mitchell believes that growth fund managers are missing a trick by not focusing on dividend yields.
The manager adds that these dividends must also have the ability to grow as a means of protecting against inflation.
This is arguably more crucial than ever, following uncertainty surrounding interest rate hikes from the Federal Reserve and the Bank of England and when they are going to be implemented.
“If you can get 7 to 8 per cent dividend growth per annum on the fund, you are protecting the value of your money and you will grow it over a period of years, so it’s terribly important,” Mitchell explained.
“We look for a 3 per cent dividend, we look for that 7 to 8 per cent dividend growth, and crucially we look for companies that have got a high profit margin or a high return on capital to re-invest, so you compound. If you take your dividend and you re-invest it into a company with a 20 per cent ROIC [return on invested capital] like Roche, you’re compounding your return. Those three things are really important and that’s where you get the dividend quality.”
Roche, a Swiss global healthcare company, is a stock that the manager currently holds in the fund’s portfolio. He particularly likes drugs companies and is finding the best opportunities for these in Europe.
Other similar stocks that he holds are multi-national pharmaceutical companies Novartis and Sanofi, which are based in Switzerland and France respectively.
For the most part, Mitchell has steered clear of emerging market stocks and is instead seeing opportunities in the US, which he has a neutral-to-underweight-exposure to, and Europe, which he holds a 17.93 per cent weighting in. The portfolio also holds 11.9 per cent in the UK, 14.92 per cent in the Pacific Basin and 9 per cent in Japan.
“We try and have a diversified portfolio. It’s about developed markets at the moment – emerging markets are having quite a difficult period. To be honest I think some of that is going to be quite structural,” he said.
“Corporate governance is a big focus for us and it’s a big focus for Jupiter as a whole. We apply that to companies but we’ve got to be pretty conservative about countries we go into, so for example there’s no Russia, there’s no Eastern Europe, there’s no South Africa because of weak currency and political problems. There’s no Turkey because it’s got one of the most volatile currencies and its politics are messy.”
“That focuses us down. That’s not to say we won’t do emerging markets, we will do Asia, we’ve got one holding in China Mobile. We will buy Chinese companies but they will always be listed in Hong Kong, so you get Hong Kong governance. Latin America is a possibility – at some stage it will come back.”
“Emerging markets still have one very important thing going for them which is demographics. It’s incredibly important – if you’ve got a young and growing population that are buying houses, consuming, growing their families, it’s a fundamental driver.”
Although even bullish investors may have turned pale on emerging markets at the moment, many have also steered clear from the US as they believe that valuations there are stretched.
While the S&P 500 index has delivered a strong performance over the last few years, its performance has slowed down since the start of the year and has been outperformed by various indices including the MSCI World and the FTSE 100.
Performance of indices in 2015
Source: FE Analytics
“Yes, valuations [in the US] are at the top end of fair value, but I don’t think they’re overvalued –there’s a big difference,” he argued. “I think there are opportunities in the US because there are some great companies that are still growing.”
“I would say that is the upper end of fair value if you look back 20 years, but that doesn’t mean you should be bearish on the US. The long-term trend of earnings is about 7 per cent and if the economy is growing you ought to be able to achieve that. Can you find companies that are growing and delivering that sort of return or a bit more? Yes you can.”
“There are a lot of companies in the US that are very big global companies, so they’re sourcing growth from all over the world, from Europe, China, emerging markets, so it’s not just about the US economy.”
However, the manager prefers Europe despite its slow growth, and says there are plenty of global-facing countries in the region that are growing their dividends.
“When we came out of the credit crunch, the US was first out of the starting block. They restructured their companies, they implemented QE much quicker, they re-organised the banks, so the economy improved much quicker,” Mitchell said.
“Europe is 18 to 24 months behind the US, so we’re having a catch up and that’s good for stocks. In Europe, if you look at the results season that we’re going through at the moment, there’s probably more upside surprise in Europe than there is in the US.”
Jupiter Global Managed has lost 2.79 per cent over Mitchell’s tenure, underperforming its sector average and benchmark by 2.01 and 0.93 percentage points respectively. However, it must be noted that this was a period of overhaul for the fund, as noted by the manager’s explanation above.
Performance of fund vs sector and benchmark
Source: FE Analytics
Jupiter Global Managed has a clean ongoing charges figure (OCF) of 1 per cent and currently yields 0.7 per cent.
