The Jupiter Global Fund - Jupiter Asset Management

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the jupiter global fund Jupiter European Growth ■■Jupiter European Growth Review of Portfolio as at 30 September 2012 Performance NAV 30.09.12 30.09.11 % Change Class L Euro Shares EUR 17.36 EUR 12.28 41.37% Class L Sterling Shares GBP 14.77 GBP 11.44 29.11% Class I Euro Shares EUR 21.68 EUR 15.22 42.44% Market Review In the period under review, markets were caught between opposing forces which buffeted equities and bonds. On the one hand, the macroeconomic challenges facing Western countries continued to stifle growth. Within the eurozone, in June Spain became the fourth country to request a bailout for a conglomerate of regional savings banks. To counter this, the European Central Bank embarked on ‘QE3’, effectively printing money. Equity markets responded positively aided by supportive US economic data and indications that China was easing fiscal policy. Over the 12 months ended 30 September 2012, the FTSE World (total return) index returned 26.9% in euro terms. The S&P500 was the standout performer, growing by 36.0%, while the MSCI AC Asia ex-Japan index was up 25.0% and the FTSE World Europe 23.1%. The MSCI Latin America index trailed over the period under review, returning 18.7%, again in euro terms. The obvious reason for the European markets’ relative underperformance is the macro challenges of the Eurozone. According the IMF, after 1.6% growth in the European Union economy in 2011, it is expected to contract by 0.2% in 2012. Developing Asia (26 countries including China and India) continues to outperform, growing by an estimated 7.8% in 2011; further growth of 6.7% is forecast in 2012. Meanwhile the US economy is expected to expand by 2.2% in 2012, after growth of 1.8% in 2011. The rate of growth in Latin America has slowed down. Nevertheless, the IMF expects the Brazilian economy to have grown by 2.7% in 2011; a further 1.5% expansion in GDP is forecast for 2012. The correlation between national economic growth and stock market performance is not always a good one: there are many distortions between broad economic growth and shareholder returns. This time, however, Europe’s macro problems and banking crisis explain the underperformance of the equity markets. This trend also held true within the eurozone: the stock markets of Southern European countries (Greece, Spain, Portugal and Italy) markedly underperformed their Northern European counterparts (Denmark, Germany, Switzerland and France), as befits their diverging macro prospects. Corporate profitability has remained impressively robust in Europe despite the deterioration in public finances and weaker growth. Corporate profits in Europe, ex financials, according to the investment bank UBS, improved by 2.6% in 2011; they forecast 2.2% profits growth in 2012. However, a more complex pattern emerges when looking at the detail. There has been a bifurcation in earnings performance between ‘captive’ companies – those that cannot escape the difficulties of the eurozone and ‘flexible’ companies that can escape. Broadly speaking, earnings from ‘captive’ companies such as banks and utilities have been disappointing. ‘Flexible’ companies, on the other hand, which have been able to take advantage of global markets (and global costs) have produced good results. Policy Review In the period under review the Fund returned 41.37% compared to a return of 23.1% from the FTSE World Europe TR Index (€), ranking it 1st in its peer group of 206 funds that make up the FO Equity Europe inc. UK TR (€) Sector. To an unusual extent our individual holdings polarised clearly into ‘winners’ and ‘losers’ – there was not much in between. The majority of holdings made positive absolute returns. The bulk of our winners were companies that we describe as ‘flexible’, global companies. Wirecard, which provides internet payment and processing services and Vopak, the Dutch based chemical and oil storage company, are ‘plays’ on increasing world trade. Johnson Matthey (the catalysis specialist), Novo Nordisk (the leading insulin manufacturer), Experian (the credit and marketing business) and Syngenta (a world leader in crop protection and seeds) all have successful multinational businesses. There were few exceptions to these ‘flexible’ global companies amongst our ‘winning’ companies. The only one of note is Grenkeleasing, the German leasing company. Its business is wholly in Europe but it is a beneficiary of the mainstream banks’ problems. Its success is a good reminder that strong business models can flourish even in adverse economic conditions. This good work was undone by a few significant mistakes which were costly. Aixtron designs and manufactures equipment for the semiconductor industry. Its profits fell sharply as overcapacity choked demand. Marine Harvest also suffered from overcapacity in its industry, salmon farming. Overcapacity and increasing competition in its key market, Russia, explains Oriflame’s poor performance. Other disappointing performers include DNB, the Norwegian bank, and Modern Times Group (MTG), the Scandinavian broadcaster. The former has not adequately exploited its position as one of the stronger banks in Europe, and MTG has seen a fall in its market share. Indeed, we sold these four positions. In all cases we had misunderstood the robustness and quality of the different business models. Moreover, in all cases we were disappointed by management response to the challenges. Holdings in Fugro, Johnson Matthey and Vopak were all reduced for portfolio management reasons. There were an unusually high number of new purchases, a reflection that this time of great challenges and change can also be a time of great opportunity for some companies. The two most significant new purchases were Fresenius SE (the German healthcare group) and adidas. Fresenius is benefiting from secular trends boosting demand for its products such as generic drugs and clinical nutrition. Meanwhile adidas has shown its ability to use the strength of its brand to move into retail, dis-intermediating the distributors. We also opened a position in Zodiac Aerospace. The company offers a wide range of products in the growing aerospace industry. 50
the jupiter global fund Jupiter European Growth ■■Jupiter European Growth Review of Portfolio as at 30 September 2012 (continued) Investment Outlook The deleveraging process in Europe has a long way to go. It is tempting for governments to increase money supply as a way of easing the debt burden at the expense of savers. Clearly the shift in economic power away from Europe will continue for some time. Accordingly, more than ever it is vital that we invest in companies that deliver demonstrably good, differentiated and profitable products and services. Those companies that can successfully tap into both the revenue and cost opportunities afforded globally can continue to flourish. Such companies exist. Our investments are held across a broad range of activities where we identify secular growth opportunities. We remain confident that our investment approach is an appropriate one. Alexander Darwall 30 October 2012 51
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