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Hidden treasures

Jupiter growth and income is an example of an auspicious fund overlooked simply because it does not reflect its sector

With thousands of funds to choose from, it is not surprising that promising funds are sometimes overlooked. One such example is Jupiter growth and income, which I think has been somewhat neglected, possibly because Jupiter had a number of UK launches in its early days and the fund was overshadowed by its better publicised stablemates.

It is managed by Philip Matthews who joined Jupiter in 1999, having been recruited by William Littlewood straight out of university. He began managing money in 2002 and four years ago took over the growth and income offering. Given its clear objective of achieving growth in both income and capital, you might expect it to be in the UK equity income and growth sector.

In fact, it falls under UK all companies – apparently, if it switched sectors it would lose its track record, which would be a shame because over the last four years under Philip’s stewardship it has performed extremely well and more than gives better-known managers such as Neil Woodford a run for their money.

Over the last four years under Philip’s stewardship the fund has performed extremely well and more than gives better-known managers such as Neil Woodford a run for their money

The fund is only £60m in size, meaning it has a lot of flexibility. At the beginning of 2009, Philip felt the market was cheap on a long-term view and that taking risk, not in defensive companies but in what turned out to be the cyclical survivors, was being rewarded. An example he gives is IMI, with a dividend yield of 8 per cent, which was cash covered even in a negative scenario and a strong balance sheet. He says his dividend discipline prevents him falling into value traps – in my view, therefore, this is a fairly classic income-orientated fund.

Mr Matthews does not believe there will be a great cyclical rebound and says the market is now ignoring strong balance sheets. He is therefore on the lookout for high quality stable earnings but is wary of areas that have already become fashionable, such as UK stocks exposed to emerging market growth, believing these already command a sizeable premium.

He prefers companies like GlaxoSmithKline, currently trading at around 10 times earnings, and still has emerging market exposure but at a much cheaper level.

He tends to look for companies that do not need a lot of capital expenditure as they will find it much harder to grow their dividends. Another area he dislikes is mining stocks, which he believes are overvalued at current levels.

With a market yield of around 3.5 per cent I expect this fund to show some strong dividend growth. Around 75 per cent of the portfolio is in FTSE 100 companies, with the balance in mid caps.

Mr Matthews particularly favours the Lloyd’s insurance vehicles at present, believing them to be particularly undervalued.

The fund’s year-on-year dividend growth has been 20 per cent and, despite it not being especially recognised by most brokers, there is positive cashflow into the fund (although this has undoubtedly been helped by the Jupiter’s fund of funds’ team, which started buying it a few months ago). This is always a good sign in my view.

This fund looks like a worthy inclusion in an income portfolio, possibly dovetailing with some bigger and better known income funds. It also shows how careful you need to be when looking at sectors. Many funds simply do not reflect the sector they are in and looking under the bonnet has never been more important. If you look under the bonnet of this fund I think you could well become a buyer.

Mark Dampier is head of research at Hargreaves Lansdown

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