The Jupiter Global Fund - Jupiter Asset Management

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the jupiter global fund Jupiter Global Convertibles ■■Jupiter Global Convertibles Review of Portfolio as at 30 September 2012 Performance NAV 30.09.12 30.09.11 % Change Class L US Dollar Shares USD 10.17 USD 9.52 6.83% Class L Euro Shares EUR 10.27 EUR 9.59 7.09% Class L Sterling Shares GBP 9.83 GBP 9.30 5.70% Class L Swiss Franc Shares CHF 10.05 CHF 9.46 6.24% Class I US Dollar Shares USD 10.35 USD 9.59 7.92% Class I Euro Shares EUR 10.44 EUR 9.67 7.96% Class I Sterling Shares GBP 9.85 GBP 9.30 5.91% Class I Swiss Franc Shares CHF 10.23 CHF 9.54 7.23% Market Review Global markets experienced wide swings in performance under the influence of weakening growth forecasts and rising risk aversion as the eurozone debt crisis intensified. Despite stronger economic growth, emerging markets were not immune from events in developed countries, because of both the potential fallout through global trade links, and the impact of the worsening crisis on investor sentiment. Following the sharp falls experienced in the summer of 2011 precipitated by the downgrade by S&P of US debt, unconvincing proposals to deal with the eurozone sovereign debt crisis and a general deterioration of economic statistics, notably in global manufacturing, markets struggled to gain positive momentum for the remainder of the year in the absence of a coherent political response in Europe. Equity markets were strong in January and February as defensivelypositioned investors responded in Pavlovian fashion to the European Central Bank’s (ECB) long-term refinancing operation. The willingness to lend unlimited three-year money to eurozone banks at 1% averted an imminent banking collapse and helped to strengthen balance sheets. It also provided a politically acceptable way for the imminently maturing government debts of Italy, Spain and others to be rolled over at interest rates that would not further destabilise sovereign debt markets. Equities consolidated in March as sovereign debt concerns resurfaced. Spanish government bond yields rose sharply. Weak economic data from China rekindled concerns about a sharp slowdown in the world’s second largest economy. Markets fell sharply in May, erasing gains for the year after an inconclusive election in Greece favoured anti-bailout parties. However, the result of Greece’s second election proved to be a sideshow as Spain became the fourth member of the eurozone to ask for a bailout, swiftly followed by Cyprus. A profound change in mood swept across markets over the summer after Mario Draghi said the ECB was prepared to do whatever it took to preserve the euro. Unlike equities, sovereign bond and currency markets continued to react to the intensity of Europe’s problems. An internal flight to safety saw yields for the two-year bonds of perceived havens turn negative whereas debt servicing costs for Spain and Italy remained unsustainably high. Elsewhere in the world, central banks redoubled their efforts to boost growth in the face of a global slowdown. In September, the ECB’s commitment to unlimited, direct purchases of sovereign debt, subject to conditions, and the US Federal Reserve’s move to open-ended Quantitative Easing underpinned further gains in equities. Policy Review For much of the period under review we kept the delta (or share price sensitivity) 1 of the portfolio toward the lower to neutral end of our range, in line with our cautious top-down view driven by the ongoing eurozone debt crisis and global growth concerns. The technical valuation of convertibles rose from their lows in November 2011 to reach fair value by April 2012. The Fund remained well diversified, holding approximately 90 securities. Within this we had a bias to hold defensive and higher credit quality names. Our biggest regional exposures have been in Asia followed by the US; these areas accounted for 35%-40% and 22%-24% of the Fund’s regional exposure respectively. In particular, we favouredconvertibles in Asia ex-Japan, where economies have a more robust fiscal and debt position than Europe and North America as well as inherently greater growth potential. That said, in December 2011 we first noticed indications that the American housing market might be stabilizing and took the view that, if sustained, this should lead to wider improvements given that personal consumption is a major component of the US economy. In our view, concerns about the ‘fiscal cliff’ are overdone and, although the labour market is worryingly weak, unemployment tends to be a lagging indicator when economies are recovering. Set against this, the fragile and often chaotic position in the eurozone warranted caution. There were several short-covering rallies largely driven by the pronouncements of politicians, but firm action eluded them. Equities remained volatile. Faced with this, we remained defensively positioned. Our normal range for the delta of the Fund is 30%-50%. During the end of 2011 and the early New Year when liquidity was poor, we kept about 5% of the Fund in cash and maintained the delta towards the lower end of our range while accumulating securities selectively. As 2012 progressed, and following the LTRO, we gradually increased the delta toward the high-30s and ended the period under review with a midrange delta of 40%. This reflected our constructive view towards convertibles alongside a cautious approach to macroeconomic risk. 1 Note: Delta is the measure of the sensitivity of the convertible price to the underlying share price 86
the jupiter global fund Jupiter Global Convertibles ■■Jupiter Global Convertibles Review of Portfolio as at 30 September 2012 (continued) Policy Review continued Within this, our major delta exposure was in the US, where there was material upside potential and economic prospects appeared more robust. The delta of our Asian convertibles was lower although the region remained a core exposure for the Fund. Investment Outlook Grave concerns about stagnation of the US labour market led the Federal Reserve, America’s central bank, to take extraordinary measures. These aimed to reduce borrowing costs for businesses, support mortgage markets and help to make broader financial conditions more accommodative. In particular, the Federal Reserve committed to continuing with these policies until there was a substantial improvement in the labour market. By indicating that interest rates would be kept at their current ultra-low level until at least mid-2015, the Fed’s actions are likely to keep a lid on short-term bond yields, thus increasing the pressure on investors to move out of low-risk assets and into the stock market. All things being equal, this should provide a supportive background for financial assets in the final quarter of 2012. But things are rarely equal. For example, the European Central Bank lacks the freedom enjoyed by central banks in the US, UK and Japan, while electorates in Greece, Portugal, Spain and elsewhere are showing increasing signs that there are limits to how much austerity they will endure. At issue is how society will resolve the build-up of debts that cannot be repaid. Nevertheless, central banks appear intent on keeping the show on the road. Maintaining some exposure to equity markets through convertibles therefore seems prudent. Miles Geldard and Lee Manzi 30 October 2012 87
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