Jupiter European Equities - Growth Philosophy and Process
Jupiter is an established active fund management business with a reputation as a desirable home for some of the most talented fund managers in the industry. Fund managers at Jupiter have significantly more freedom than those at many larger institutions – something that ensures the company has a healthy pipeline of talent. This is a big draw for people making decisions on where to invest. The appointment of Mark Nichols and Mark Heslop allows Jupiter to seamlessly cover the European waterfront from megacaps and large caps through to midcaps down to smaller companies. In this Strategy Matters, they describe the key elements of their well-established investment approach.
Executive summary
Whatever the broader economic backdrop, we believe there are always opportunities and superior companies that can take advantage of them – but they can be few and far between. The challenge for us, therefore, is to achieve a deep understanding of prospective holdings, identifying risks to business models and growth expectations, as well as the industries in which they operate, to enable us to assess whether their long-term potential is appropriately valued.
On the one hand, our approach implies there are indeed market inefficiencies that we can exploit; and our experience tells us this is certainly the case in European equities, as it is elsewhere. On the other, it implies the need for almost forensic analysis to give us the confidence that we have found a mispriced business exhibiting the sort of quality and growth potential that is worthy of a long-term investment.
Our investment approach has the following characteristics:
- We seek to identify long-term excess returns that are underappreciated by a market driven by short-termism.
- We typically favour quality franchises with high barriers to entry, and growth companies supported by secular, rather than cyclical growth drivers.
- Our business model analysis is thorough, and we utilise Porter’s Five Forces to assess industries and competitors.
- We have a long-term investment horizon; turnover is low, and we expect company growth to compound shareholder value.
- Our approach is high conviction and benchmark agnostic; we only buy companies we like and have no obligation to hold index giants.
- We keep the strategy fully invested and do not make tactical allocations to cash.
- Our understanding of valuations is informed by cash flow and returns metrics, not short-term earnings.
Long-term excess returns underappreciated by market driven by short-termism
In our experience, short-termism in the market can create opportunities for long-term investors committed to conducting thorough analysis. It is common knowledge that mean reversion is a feature of real-world economics. Thus, businesses that earn high returns on capital tend to attract competitors who then compete away those returns on capital back down towards the cost of capital. We see this feature underpinning market behaviour. We have observed that the equity of the best businesses is often mispriced and believe diligent analysis can identify ways to exploit this anomaly. But why is there a mispricing? The rise of short-termism in equity market behaviour in recent decades is wholly at odds with the investment horizon of business management teams and their broad base of stakeholders. This mismatch in time horizons creates an inefficiency that we seek to exploit.
We have seen that there are businesses that stand out, companies which deliver higher returns, higher growth rates and sustain them for much longer than the majority of professional stock market investors are prepared to ascribe value to. This is because they have protective moats around their business. Market myopia means it can take a long-time for the stock market to recognise the true value of some highquality growth assets, so patience is required.
Fig 1. Inefficiency we seek to exploit
The nature of competition
Understanding the nature of competition within an industry is vital to our long-term approach. Industries where many businesses sell a similar product often face intense competition that results in commoditisation and anaemic long-term returns on capital. At the other extreme, industries that enjoy a natural monopoly often see their profitability determined by regulators. Somewhere in the middle, we can identify industries that operate in quasi-oligopolies where profitability can be sustained.
Where we find attractive industry structures, e.g. where there is no single customer who can drive prices down and where there is no single supplier who can squeeze margins, then we start to get businesses that can generate consistent cashflows. Businesses that can generate sustainable and growing cashflows tend to have the opportunity to reinvest in their businesses for more growth in the future and deliver higher investment returns that are not simply competed away. When we find such businesses we are looking to buy and hold.
Quality franchises
We target investments in businesses where we have identified sustainable competitive advantages and attractive industry economics. We invest in these companies and allow the economics of the business to create a compounding effect over the long term. It is this long-term compounding of capital being reinvested in a business at a high rate of return that helps drive the growth in value of a business and deliver attractive long-term growth for investors. We fundamentally believe that equity returns are best understood at the level of the individual business. The economics of businesses and of industries will determine long-term investment returns, not the macroeconomics of central banks, politicians and regulators.
Identifying secular growth opportunities
Our time-intensive process begins with identifying companies with strong business models exposed to secular growth, with sustainable returns on capital and first-class management teams. We are seeking genuine growth companies; long-term winners. Our process seeks to find the best of these from the universe of European-listed equities. Identifying such businesses often requires significantly more work and insight than many market participants can give time to, assuming they have the capability. The universe of companies that we can fish in is large and there will always be better ideas that could fit in our portfolios. We are always on the hunt for those new ideas.
Fig 2. Structural growth opportunities
Sources of sustainable competitive advantage
There are a variety of business characteristics that may yield a competitive advantage. Some companies benefit from several. Some examples are: Intangible Assets: Patents, brands, regulatory licenses and other intangible assets can prevent competitors from duplicating a company’s products or allow the company to charge a significant price premium. Network Effect: A network effect occurs when the value of a company’s service