The £1.242bn Jupiter Income fund has consistently outperformed since Tony Nutt took over management three years ago
Tony Nutt has had a tough act to follow since taking over management of the giant Jupiter Income portfolio from William Littlewood in April 2000.
Although he was already manager of the Jupiter High Income fund, Nutt was not a high-profile Jupiter manager at that time and his appointment provoked a cautious reaction from many investors.
Before Nutt took over its management, the Jupiter Income fund had been suffering from relatively poor short-term performance due to its lack of exposure to the then-booming TMT sector.
Nutt has been successful in boosting the fund's returns and has become one of the best known names in UK fund management for his ability to deliver strong outperformance on a consistent basis.
He keeps the fund overweight mid-cap stocks, where he seeks out undervalued companies.
He is also quite dogmatic in terms of stockpicking, refusing to hold companies he does not like, regardless of their index weighting.
The £1.242bn portfolio currently sits in the top quartile of the performance league tables over both one and three-year timeframes. Over 12 months to 31 March, it is ranked 18 out of a field of 81 funds in the equity income sector, returning a loss of 27%, offer to bid, compared to the sector average loss of 29.2%.
The fund is ranked 15 out of 74 funds over three years, losing 13.8% against the sector average decline of 24.5%. It has a Standard & Poor's AA rating.
Nutt's other portfolio, Jupiter High Income, is currently 26% invested in bonds. The fund aims to deliver a higher yield than the Income fund. Nutt also manages the equity portion of the Jupiter Distribution fund, while John Hamilton manages the fixed income component.
What do you ideally look for in companies you might hold?
A company must have good cashflow and reliability of earnings. My top 10 holdings have all delivered reliable earnings. They include Associated British Ports, Liberty International, Persimmon, Northern Rock, Land Securities, Royal Bank of Scotland, Lloyds TSB, Gallaher, P&O Princess Cruises and Safeway. Any stock must also have a low valuation
It must be a quality company but there is no point buying something for which the rating already reflects the growth potential.
Do you buy stocks that do not have dividends?
Yes, a stock does not have to have a yield. For example, I hold BSkyB, which doesn't pay a dividend. I think it is an awesome business with very good market share so it is beneficial to the overall return on my portfolio.
Do you continue to favour mid-cap stocks?
I have maintained the historic bias towards high-quality, mid-cap stocks. The fund is three times overweight mid caps relative to the FTSE All-Share. There are plenty of opportunities to find value in this market but we have to look at companies that are materially undervalued.
It is more difficult to do this in the FTSE 100 as it is concentrated into a handful of stocks. The top five companies make up 25% of the index.
How many stocks are in the Income portfolio?
I have 130 stocks. Diversification is important, particularly given the high levels of concentration in the index.
Do you impose risk constraints at a stock level?
The fund is benchmarked against the FTSE All-Share. I do not hold companies about which I am not positive. For example, I do not hold some of the bigger stocks in the FTSE such as GlaxoSmithKline and Vodafone and I have only a 0.8% position in BP, even though it represents about 8% of the index.
It is all about how you define risk. If a stock is about 7%-10% of the portfolio and you are negative on it, why hold it? It is fainthearted of managers to have a half weighting in stocks they do not like. I can see why they do it but it is not for me.
Are there risk controls relative to the index at a sector level?
No, again I do not hold some of the UK's main sectors. I have no exposure to the pharmaceutical sector, avoiding stocks such as GlaxoSmithKline and AstraZeneca. This is because returns on pharmaceuticals are negatively affected by pressure on healthcare budgets.
I have a tiny exposure of about 2% to oils as the price is artificially high. The exposure I do have is more of a trading position than anything else: 0.8% in BP and 1.2% in Shell.
I have small exposure to telecoms through BT. In hindsight, I got into this stock a bit early and that has been a mistake. However, I now feel this company is on the road to recovery.
I have a half weighting in financials. The banks are divided into three sub-sectors: Far Eastern, mortgage and domestic.
My view on banks is very company specific. I have not taken a broad-brush approach by investing in everything. We have made good returns on Alliance & Leicester and we are also exposed to Standard Chartered.
What are your most overweight sectors?
I like construction, which accounts for around 10% of the portfolio. I also like property, which represents just under 10%.
Property is particularly attractive because of the significant discounts to net asset value in many of the stocks. My second biggest holding is Liberty International, which owns all but one of the UK's leading out-of-town shopping centres.
Transport is another overweight but not aeroplanes. My biggest position is AB Ports, which has a local monopoly in the UK, owning some 30 ports. It is very defensive in the current economic climate with good prospects for growth and has delivered everything I could have asked for.
Is there a high level of turnover in the portfolio?
At times there is. As a fund manager, you have to be very flexible. There will be times when it is important to be an active investor and achieve your returns from trading the technical movements in the stock market.
The shortest period I have held a stock is three weeks. Most of the time, however, I take a long-term view of 12-18 months. I therefore have valuation targets and do not sell the stock.
At these times, it is probably best if I am not in the office as I do not consider I am adding a lot of value. I largely take advantage of such periods to visit clients. The current volatile market conditions suit more short-term trading opportunities, however.
Do you expect to increase the yield this year?
Probably not. The history of this fund is that in 1999, the dividend grew by about 35% year-on-year, in a market in which yield growth was static. Since then, it has been more a question of balancing it out.
The distribution will grow in due course but we need more dividend growth in the market for that to happen.
Is the stock market likely to recover any time soon?
Predicting the market is a mug's game. We have come from a very low base at the start of the year, which means there is scope for upside.
However, the whole issue of the Iraq war is a much greater contributor to the very poor sentiment we have seen than is generally perceived. The uncertainty over what could happen in Baghdad is pretty bad for markets.
There are also some significant issues in the market, for example whether the largest companies in the UK, US and Europe are correctly valued.
FUND MANAGER: Tony Nutt
Nutt has managed the Jupiter Income trust since May 2000, Jupiter High Income since launch in 1996, Jupiter Dividend & Growth since November 1999 and co-managed the Jupiter Distribution fund since launch in March 2002.
Nutt joined Jupiter in 1996 when his previous employer, R&M Investment Trusts, was acquired by the firm.
He has also worked as a fund manager for TSB Investment Management and UKPI.
Succeeding co-founder Simon Rogerson
Janus Henderson Global Dividend Index
More than 10 million shares allocated
Long-term strategic holding
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