The Jupiter Global Fund - Jupiter Asset Management

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the jupiter global fund Jupiter Strategic Total Return ■■Jupiter Strategic Total Return Review of Portfolio as at 30 September 2012 (continued) Policy Review continued Central banks have created a world of zero interest rates and then indulged in massive purchases of government bonds. By the summer of 2012, the Bank of England owned about half of the free float of UK gilts with a maturity over three years. Most gilts offered negative real returns. We were short as the downside risks dominated, while the upside depended on prospects for further quantitative easing, to which there is a natural limit. We were also short in some eurozone sovereign debt, although this was costly to performance for much longer than we expected as we underestimated the positive impact of the LTRO. Besides lowering interest rates, central bank asset purchases are intended to nudge investors into risk assets by inducing a rebalancing of portfolios. Often, they chose risk assets that lay outside of the home country of the central bank. Like a shoal of fish that suddenly switches direction, this global capital moved from ‘safe’ havens to risk assets and back causing sizable price distortions which themselves had knock-on effects. For example, capital flows into Switzerland pushed the franc to levels that hurt its exporters and threatened to push the country into recession. Switzerland’s move to peg its currency against the euro led the Swiss National Bank to sell francs and buy German, Dutch, French, Finnish and Australian bonds. Zero interest rates also influenced the carry trade. Once it was the yen that was borrowed to fund higher yielding assets. Zero interest rates have widened the number of currencies to borrow against while reducing the number with attractive yields. Australia, whose dollar yielded 4.25% at the start of 2012, has been a prime target for the carry trade with some 80% of the government bond market being owned by foreigners. We believed that this together with tight monetary policy had driven the currency to over valuation. In our view, the consensus expectations for strong growth in demand for the country’s natural resources was overly optimistic given the decline in China’s demand for raw materials. Thus, we positioned the Fund to be long Australian bonds (where we expected a rate cut) and short the Australian dollar. Even a board member of the Reserve Bank of Australia said ‘there’s too much froth in the Australian currency’. We later took profits from our long position in the bonds after they reached our target. The Fund also gained from its dollar short (the RBA cut rates to 3.75% in April) and, although the carry trade continues, we have maintained the short. Confidence matters. Whether or not a country can maintain access to the bond markets in order to roll-over its debts depends on how confident bond markets are that a county is willing and able to pay its debts with a currency that has a value that can be maintained. In the US, signs of moderate economic growth together with signs of stabilisation in the housing market led us to be long of the dollar. In Japan, the trade balance moved into deficit for the first time in three decades. This indication of the economy’s fragility had led us to be short of the yen in anticipation of it weakening. Many have been bearish on the yen for a long time, indeed Japan has been in a deflationary spiral for some twenty years. A weaker yen is one remedy. We have no crystal ball but take the view that overvalued situations eventually correct. The Bank of Japan continued with quantitative easing and in February was explicit in setting a goal of 1% inflation at a time when the current inflation rate was -0.1%. Identifying overvalued situations where fundamentals are likely to deteriorate is not difficult. However what adds uncertainty is the extreme short-term nature of global capital flows. In South Africa, we were short of the rand (against the Mexican peso, where terms of trade and exports are improving) because the labour and political situation continued to deteriorate, thus weakening the fundamentals for the economy. This position has not yet yielded results because, as an emerging market, the country received periodic inflows of global capital such that the rand can rally strongly during ‘risk on’ periods. In addition, passive inflows intensified after the South African bond market was included in the World Government Bond Index in autumn 2012. The launch of future contract in French OAT bonds provided us with an opportunity to open a short position as we anticipated deterioration in that market as the debt crisis continued to claim larger scalps. In our view, the yield gap between French OATs and German bunds was too narrow, making the former vulnerable because of fundamental weaknesses in France’s economic fabric. Investment Outlook In the face of a global economic slowdown and debt deleveraging, central banks around the world have redoubled their efforts to boost growth. However, it is of concern that they have begun to make a habit out of the unconventional monetary policy that was once considered a necessity. Without private demand for loans, the massive amount of liquidity created by central banks stays mainly within the financial system pushing the yields on bonds down and the price/earnings ratios on shares up. Asset prices then fluctuate according to news flow rather than reacting to fundamentals. Zero interest rate regimes may even be a trap, i.e. hard to get out of. When private demand for loans eventually returns and the money supply balloons, central banks will have to mop up excess liquidity fast to contain inflation. However, aggressive tightening risks jeopardising a nascent recovery, whereas any delay could raise inflation expectations and send bond yields sharply higher. Either way a major ordeal awaits bond markets. Mindful of this, the Fund’s largest active exposures are short positions in sovereign bonds, reflecting their extreme overvaluation. It is also positioned to take advantage of certain distortions in currency valuations and to maintain some exposure to equity markets through convertibles as central banks appear intent on keeping the show on the road. Miles Geldard and Lee Manzi 30 October 2012 82
the jupiter global fund Jupiter Strategic Total Return ■■Jupiter Strategic Total Return Schedule of Investments as at 30 September 2012 Quantity/ Nominal Description Fair Value € Fair Value as a Percentage of Net Assets % Transferable securities and money market instruments admitted to an official exchange listing Equities Channel Islands 589,964 0.62 4,700 ETFS Physical Platinum 589,964 0.62 Germany 229,800 0.24 15,000 Deutsche Post 229,800 0.24 Japan 1,563,212 1.63 5,600 East Japan Railway 288,621 0.30 220 Fuji Media Holdings 280,287 0.29 15,900 Kao 364,565 0.38 50,000 Sekisui Chemical 313,524 0.33 13,000 Sumitomo Mitsui Financial 316,215 0.33 United Kingdom 298,317 0.31 73,000 BAE Systems 298,317 0.31 Total Equities 2,681,293 2.80 Bonds Belgium 188,913 0.20 250,000 Sofina 1% 19/09/2016 188,913 0.20 British Virgin Islands 806,324 0.84 6,500,000 Power Regal Group 2.25% 02/06/2014 806,324 0.84 Denmark 1,175,569 1.23 900,000 Danske Bank 4% 09/12/2015 1,175,569 1.23 Finland 2,074,248 2.16 1,100,000 Solidium Oy 0.5% 29/09/2015 1,151,480 1.20 700,000 UPM-Kymmene 6.625% 23/01/2017 922,768 0.96 France 5,466,334 5.71 1,100,000 Carrefour 3.625% 06/05/2013 1,119,305 1.17 1,100,000 Electricite De France 4.625% 06/11/2013 1,147,691 1.20 7,500 Faurecia 3.25% 01/01/2018 139,913 0.15 50,000 Maurel et Prom 7.125% 31/07/2014 901,250 0.94 1,000,000 Sanofi-Aventis 3.5% 17/05/2013 1,019,450 1.06 1,100,000 Vivendi 4.5% 03/10/2013 1,138,725 1.19 The accompanying notes form an integral part of these financial statements. 83
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