Venture: Small-Cap Fund Manager

Issue 21;

Something for nothing.

Jupiter Fund Management (JUP LN)

“Jupiter is a specialist, high-conviction, active asset manager. Our purpose is clear – we create a better future for our clients and the planet with our active investment excellence.”

There can be no doubt that JUP has faced negative headlines lately, but so have all active fund managers. I hold the view that when big tech rolls over, the fortunes of active managers will be restored or at least be revived. Investing is not supposed to be easy, but it is simple, and active managers know that. The large index funds have distorted the market beyond belief as passive funds have overtaken active funds.

I recently recommended Man Group (EMG) in the Whisky Portfolio on an enterprise value/sales ratio of 0.5x. JUP trades on half that. Revenues are roughly where they were before the pandemic, yet the enterprise value has fallen from £2.5 billion in 2017 to just over £100m today. I describe JUP as a small cap, which is… bizarre. They are an investment giant.

Jupiter is Undervalued

The free cash flow yield is 20%, the dividend yield is 7.8%, the debt is negligible, and the PE is 9x for next year. It didn’t escape my attention that there was an upgrade to earnings forecasts, although not a large one. The shares have closely followed earnings, which is not unusual, but should they?

Jupiter’s Shares Follow Earnings

The value is not in the earnings, or even the scope for recovery, but in the balance sheet. Twelve brokers cover this stock, with two sellers and just one buyer, and the shares trade at the target price. The progress is that two years ago, over half were sellers. Things must be stabilising.

As of the end of 2023, JUP manages £52.2 billion, with 61% in equities, 18% in fixed income, 14% in multi-asset and 7% in alternatives. 81% of their clients are retail, who pay higher fees than institutions and tend to be stickier. 66% of the clients are in the UK, 22% in EMEA, and 12% in Asia and the rest of the world.

Investment performance across their funds has generally been pretty good, especially compared to competitors. Looking at the share price, things haven’t been anything like that bad, in terms of assets under management or business performance.

Then, earlier this year, one of their “leading fund managers”, Ben Whitmore, who ran the UK Special Situations Fund, resigned. His fund beat the FTSE All Share by 1% over five years. (Do they realise the Whisky Portfolio beat the FTSE by 67%?). I doubt Whitmore (less?) will take many of the assets, and JUP will hang on to the bulk, especially since they have hired a new crack team to defend the franchise.

Less Is More?

I like the price action. The shares dropped on the news but have rallied since. It looks like peak bad news. Besides, it’s probably not bad news at all.

The market cap is £482 million, and there is £501 million of cash on the balance sheet. There are £130 million of liabilities, but these are non-debt. The EV, which I mentioned earlier, is £112 million for a £52 billion asset management business, which is expected to deliver £50 million of free cash flow each year. They are cutting costs, with headcount already down by 20%.

I see JUP as a fundamentally good business. The value of its shares is ludicrously low, just as the value of big tech is ludicrously high. There is the potential to use the cash to buy back stock when things stabilise or acquire cheap competitors, which will create lasting value. As I said, the analysts are too focused on profits while ignoring the balance sheet. 

Risk

JUP is a profitable business with a strong balance sheet. Active management has been in decline, and this may continue for a sustained period. JUP is reasonably liquid, trading £1m in a typical day. The shares have been volatile, but that should calm as things settle. I deem JUP to be high-risk.

Venture Update

BATS is selling assets to fuel buybacks.

HOC has beaten estimates but felt it was inappropriate to restore the dividend at this stage and will reassess in August.

Note: Prices are recorded at the time of recommendation.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture