1 Jupiter European Opportunities investment trust is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research. Please see the important information at the bottom of the page. Jupiter European Opportunities Summary Jupiter European Opportunities (JEO) is a growth-orientated portfolio of high-quality companies listed across continental Europe and the UK. Since 2, Alexander Darwall has invested JEO s capital in the same manner by investing in what he sees as exceptional companies, expected to grow irrespective of the wider economic environment or stock market cycles. He sets great store by company meetings with management, trying to identify the twin pillars of the right company and the right management which underpin his disciplined approach to stock selection. Having identified these companies, he looks to identify long-term structural trends which will help the company grow. Alexander has full flexibility to invest outside of continental European listed companies. The requirement is that most of the companies held will undertake a substantial proportion of their business activities within Europe. Currently c. 2 of assets are invested in UK listed companies. In the managers view, their investee companies are increasingly global, but are unified by their common roots as being driven by European expertise. Compared to the investment trust peer group, JEO has been the best performer over one, three, five and 1 years to the end of December. Since 21 Alexander has only underperformed the benchmark in two years 28 and 216. The compounding effect of Alexander s outperformance has meant, over the last ten years, the trust has delivered NAV total returns of 247 against a benchmark return of 8, and the average open-ended European fund of 84.7. Relative to peers, according to Morningstar s style analysis, JEO has the purest growth portfolio of the investment trust peer group. It is also the only trust which has any significant exposure to UK stocks, and whilst over the long run the NAV has similar volatility as peers, over the past three years it has been the most volatile. Gearing has, over the long-term, averaged around 1, according to the manager. However, seeing good opportunities appearing during 216, gearing was ramped up quite significantly and started 217 at 17. The current level of gearing is in the region of 4. European investment trusts across the board have recovered much of the ground lost in discount terms since the referendum, and JEO has consistently traded at a premium rating to the rest of the investment trust peer group. Portfolio Jupiter European Opportunities has had a consistent investment approach applied since 2, which can best be encapsulated in one sentence: Alexander Darwall looks to find exceptional companies which he expects to grow irrespective of the wider economic environment or stock market cycles. Exceptional in that there are not many of them, and Alexander and his team generally hold only around 4 companies at any one time. Very little heed is paid to the benchmark, with no restrictions on where companies are listed, aside from the fact that most of the companies held will undertake a substantial proportion of their business activities within Europe. As proof of this, Alexander has run the portfolio with a consistently high active share of around 95. With a relatively low turnover approach, the team have a tendency to run winners. This has meant that the concentration of risk in the portfolio is relatively high historically and with around 7 of the portfolio currently held in only ten stocks, concentration has not been higher in the last ten years. Alexander very much leads the investment process, and has a highly idiosyncratic approach to stock selection. He sets great store by company meetings with management to understand how businesses work, what returns on investment management expect, and looks for reassurance that they are willing to take difficult decisions when they are needed. Having been at Jupiter since 1995, Alexander has built up strong relationships with management teams over the years, and looks to understand each of his companies extremely well, as well as those of its competitors. Alexander personally meets with around 16 different companies per year, and the team around 3 per year in total. Alexander takes corporate governance seriously, and takes the decisions on how to vote at company meetings himself. Throughout company meetings, Alexander is trying to identify the twin pillars of the right company and the right management which underpin his disciplined approach to stock selection. He looks for good ownership structures, which have successful and proven business models. When paired with open, honest and accountable management, Alexander looks to identify long-term structural trends which will help the company grow.
2 In his view, the companies that he likes tend to do well in different macro conditions (being typically globally spread, if only listed in Europe). They are usually large and mid-cap companies (ave. market cap of c $25bn), which can benefit from the efficiencies of size. We understand that this has been a particular feature over the past few years, with many investee companies being able to refinance on the global markets at very attractive rates, whereas smaller competitors still use bank financing. Companies that he buys are typically highly flexible either operating in the digital world, able to quickly react on the cost side of the business, or act flexibly in terms of their allocation of capital. The final piece of the puzzle is valuation. The team are growth investors, and as such valuations are viewed on much more of a relative basis than an absolute one. Alexander believes strongly that patience pays and is happy to hold on to a company over the long term if he sees fit, but the market is taking a different view and has pushed the share price lower. As such, the portfolio typically trades at a premium to the market - currently the weighted P/E of the portfolio on next year s earnings is 22, against the index which is 16X. The team believe that this gap isn t as wide as it appears, as consensus earnings for the portfolio of 12 (on which this P/E is based) is below what the team expect (consensus earnings for the market is 7.8). from in the previous financial year. The managers highlighted to us that in their view, their companies are increasingly global but are unified by their common roots as being driven by European expertise. Emerging Markets North America Gearing Jupiter European Opportunities Trust Portfolio underlying sales as at 3/9/17 Japan & Australasia Unassigned Europe The board is in charge of setting gearing levels, and is happy to see gearing increasing at times of low valuations, and decreasing in strong markets. We understand from the managers that they tend to see gearing employed for specific investment opportunities than the general investment environment. As regards sectoral biases, because of the traits of the companies he looks for, Alexander says that he rarely invests in sectors such as real estate, utilities or commodities, sometimes in financials and retail, but often finds interesting ideas in the technology, healthcare items, industrials and media sectors. The current breakdown can be seen in the graph below. Jupiter European Opportunities Trust Basic Materials Sector breakdown Gearing has over the long term, averaged around 1 according to the manager. However, gearing was ramped up quite significantly over 216, and started 217 at 17. This reflects the approach that the managers employ in investing into specifics, and anticipating strong subsequent performance. So, when in May 217 Syngenta was taken over by a Chinese buyer (at c1 holding), the managers were not in any rush to redeploy the cash received. According to the manager, the current level of gearing is in the region of 4. Consumer goods Technology Telecoms Financials Industrials Returns Jupiter European Opportunities principal aim is to deliver capital growth dividends are paid out only so that the company can maintain its investment trust status. Compared to the investment Jupiter Euopean Opportunities Health Care Consumer services 4 Calendar Year returns As we highlight above, Alexander has full flexibility to invest outside of continental European listed companies. The requirement is that most of the companies held will undertake a substantial proportion of their business activities within Europe. Currently c. 2 of assets are invested in UK listed companies. Where a company is listed often bears little relevance to the geographies it is exposed to. The graph below show s Jupiter s estimate as to where sales for the portfolio (as at 3/9/17) come 2-2 21 211 212 213 214 215 216 217 Jupiter European Opportunities NAV FTSE World Eur Ex UK MSCI Europe Morningstar IT Europe IA OE Europe Excluding UK Powered by Highcharts Cloud
3 trust peer group, JEO has been the best performer over one, three, five and 1 years to the end of December. In-fact, one of the most remarkable facts about Alexander s performance track record is that since 21, the first full calendar year in which Alexander has run the trust, he has only underperformed the benchmark in two years 28 and 216 - both of which were rather momentous years for active management. He has also outperformed the average open-ended fund in every calendar year except these two same years but also turned in a marginal underperformance in 21 of.5. As the graph below shows, all European trusts suffered as a result of the Brexit vote. In 216, the trust had its own idiosyncratic problems with several of the main holdings. This was exacerbated relative to the benchmark and peers by a lack of exposure to the oil and gas sector which rebounded strongly. Many of the idiosyncratic stock-specific concerns were lifted in 217, with the resulting very strong performance last year. The managers highlight that a core part of their investment process is having patience, understanding management teams, as well as the rhythms of business as helping them recover from tougher times in performance terms. 15 1 5 Jupiter European Opportinities: Performance vs indices The compounding effect of Alexander s outperformance has meant, over the last ten years to the end of December, the trust has delivered NAV total returns of 247 against a benchmark return of 8, and the average open-ended European fund of 84.7. It is worth noting that the MSCI Europe Index (which includes the UK) is up 113. Peer group past five years 214 215 216 217 218 JEO (Cum Fair NAV) FTSE World Eur Ex UK MSCI Europe Morningstar IT Europe IA OE Europe Ex UK As we comment in our report, the European peer group is the most consistently outperforming of all the investment trusts and open-ended peer groups. As we show in the performance section above, JEO has been one of the most consistently good performers of this already top-performing group. Alexander has consistently had the best alpha (a technical term that shows the value a manager has added to a fund s performance) scores for one, three, five and 1-year periods. Most of the trusts in the peer group have a similarly focused portfolio of between 37 and 67 stocks. Using Morningstar statistics, we can identify several characteristics which do mark it apart from the peer group. Firstly, according to their style analysis on the underlying portfolio, JEO has the purest growth portfolio of all of its peers. It is also the only trust which has any significant exposure to UK stocks, and whilst over the long run the NAV has similar volatility as peers, over the past three years it has been the most volatile. Dividend Jupiter European Opportunities is a capital growth focused trust and any dividends it has paid have come about solely as a result of the need to distribute any income it receives to maintain investment trust status. At the current level, the shares yield.9. Management Jupiter Asset Management continues to tread the line successfully between harnessing the advantages of scale and allowing its managers to follow their instincts and behave independently. Alexander joined Jupiter in 1999 from the sell side at Goldman Sachs. He took over Jupiter European Investment Trust in that year, and it morphed into Jupiter European Opportunities in 2. Since then he has had a high degree of autonomy to invest as he sees fit. It has been a successful strategy, and so his open-ended fund (and other strategies/institutional mandates) has grown significantly. In total he now manages 8.4bn. In some ways, this very large size of AUM rings alarm bells, but the relatively low turnover approach and the fact that he has continued to generate outsized levels of outperformance all through his career, even as he has added assets, gives us reassurance that the portfolio hasn t become too large. Alexander has a co-manager in the form of Luca Emo, and Jordane Guillot as an analyst. Discount Given the strong and consistent long-term outperformance of the peer group, as the graph below shows, over the past three years JEO has consistently traded at a premium rating to the rest of the investment trust peer group. European investment trusts across the board have recovered much of the ground lost in discount terms since the referendum and JEO is no exception, having come back from a low point of nearly 14 to its current level of around par (i.e. ). The risks, on a discount basis, are therefore to the downside, although the shares have for long periods traded at a premium valuation. The board have permission to buy shares back, last doing so in 211 when the trust was trading on a discount of around 11.
4 1 5-5 -1-15 Charges Jupiter European Opportunities: Discount vs peers last three years Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jupiter European Opportunities Euro IT sector average Powered by Highcharts Cloud Jupiter Asset Management charge a fee of.75 of Gross Assets (i.e. including any gearing deployed). Two other trusts in the investment trust peer group have a higher management fee of.85, but these are charged on net assets. This means that the trust is on the expensive side, but not far from the average that we calculate of.725. In addition, the manager is entitled to a performance fee of 15 of NAV outperformance of the benchmark. According to the last report and accounts, the board have come under some pressure to abandon the performance fee arrangement (although as the Chairman states not from institutional shareholders ). The two Henderson trusts in the sector also charge performance fees, and so JEO is not alone in incentivising the manager in this way. However, in contrast to most of the peer group, the company seeks exposure to Europe including the UK, but the benchmark on which the performance fee is calculated, doesn t include the UK. Some might argue that a UK inclusive benchmark might be more appropriate as a basis for the performance fee. If Alexander hadn t done quite so well for shareholders, then t more pressure may have been brought to bear to square up this arrangement. As it is, he has been the preeminent performer within the sector for the past five years, and the board concluded that the retention of the performance fee structure is fair and reasonable. The OCF of the trust currently stands at.99 (excluding the performance fee).
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