“Trust is the raw material from which all types of money are minted.” – Yuval Noah Harari
“I am not upset that you lied to me, I am upset that from now on I cannot believe you.” – Friedrich Nietzsche.
We hold no edge on the big-picture questions of the day. It is noteworthy, however, that markets have rallied significantly during the second quarter, and aggregate valuations as we write sit above their pre-tariff-golf-card levels. While company valuations, particularly in US growth stocks, sit towards generational highs, measures of economic policy certainty sit at record lows.
If it is as profitable to answer a simple question as it is to answer a complex one, go for simplicity. In our case, we spend our time trying to answer questions of company-specific valuation. We find fewer people competing to assess the rough value of toothpaste profits in South Korea than we find competing to understand the impact of President Trump’s tariffs on global growth (let alone whether the US Federal Reserve thinks markets should start thinking about the Fed starting to think about guiding rates in a particular direction).
In the pursuit of capital preservation first and compounding second, we look for investments with the common thread of low valuation (margin of safety) and conservatism (ideally low leverage, resilient businesses and family or aligned shareholders `eating their own cooking’). We have assembled a wonderful collection of them in the portfolio, in our view, and have added to the collection over the quarter.
Peaky valuations
The strategy ended the quarter broadly in line with the global index but took a very different path to get there.1 The strategy protected capital during the rout but participated less in the sharp rally afterwards, as growth stocks hit all-time highs. As aggregate valuations are now back at peaky levels (as we write) by most traditional metrics, we remain confident the portfolio has retained its defensive characteristics for any future storms.
One of the most notable differences between the strategy and the index is our US weighting. While the strategy is diversified quite broadly by geography and holds just 17% in US businesses, the ‘global’ index is quite geographically concentrated with c.65% invested in US equities. Despite our relative underweight, it was US companies that kept us busy during the quarter with active engagements at Paramount Group Real Estate and WK Kellogg.2
During Q1, we retained lawyers in the US to investigate a derivative action against the Chairman and CEO of Paramount Group Real Estate (PGRE) regarding his use of company funds.
The situation was resolved without incurring material legal expenses by engaging with other shareholders. The business subsequently announced it was putting itself up for sale, the shares spiked , and we took profits on our investment.
Questions about Kellogg sale
Regarding WK Kellogg, the Global Value strategy has become one of the largest shareholders of the maker of Kellogg breakfast cereals in the US and Canada through our investment in the company. During the quarter it was rumoured that Ferrero was interested in acquiring the business. We engaged with the management of WK Kellogg to request that a formal sale process was run. As the Board are entrusted with selling our assets, we should expect them to sell to the highest price from all possible bidders, not simply taking the highest price offered in negotiations with a handful of inbound suitors.
In recent weeks, the business has announced a definitive agreement of sale to the Ferrero group, which has been bittersweet. It is at a premium to the undisturbed share-price (which has locked in good profits from our investment), but the price represents a material discount to our assessment of fair value. The deal comes with a penal break-fee which does not appear to be in shareholders’ interests, in our view. We have filed a Section 220 request with the company – a formality under Delaware corporate law, which should force the company to disclose further information about the deal. If we are furnished with evidence that supports our belief that the Board failed in their duties to seek a proper bid, we may have further upside to our investment. If we are wrong, our downside is likely capped at the bid price, so our investment is now a cash-proxy with significant option-value while we await more information.
Beauty, cosmetics, toothpaste
In late April we purchased shares in Estee Lauder, owner of many of the world’s most iconic beauty brands. The shares had been depressed by a mixture of muted consumer demand, Chinese consumption weakness, a bloated cost base, and some family feuding over management of the business. The shares rallied dramatically in the months since, and we have taken some of our profits to limit our exposure to the sector.
As a reminder, LG H&H is one of our largest investments, and it holds a large cosmetics business alongside its more mundane detergent, toothpaste and Coca-Cola bottling businesses in Korea. The capital allocation approach at LG H&H has been suboptimal, in our view, with the management team hoarding net cash and refusing to buy back stock. This is something we will continue to engage actively on to remedy.
Staying within the beauty space, we also hold the Brazilian cosmetics business Natura, which has at various stages owned Aesop - £33 a bottle - Soap, the Body Shop and Avon. The business has embarked on a simplification process under one of the founders, which is returning it to focus on their core Natura brand in Latin America while merging the Avon/Natura sales forces. In aggregate, luxury cosmetics as an industry appears cheap, but as followers of the strategy will know, we always strive to avoid too many eggs in any one basket.
While the markets once again stand at extremely elevated levels in aggregate, we hold a collection of what we believe are strong businesses trading at low prices. A high proportion of these are run by owner-managers who are heavily personally invested in their businesses. We hold no crystal ball on the level of markets or the moods of presidents, but believe our portfolio is well placed to protect and grow our capital in real terms come what may.
Footnotes
1Past performance is no indication of current or future returns.
2Company examples are for illustrative purposes only and are not a recommendation to buy or sell.
Please note strategy risks:
- Currency (FX) Risk - The strategy can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
- Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Derivative risk - the strategy may use derivatives to reduce costs and/or the overall risk of the strategy (this is also known as Efficient Portfolio Management or "EPM"). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the strategy.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the strategy's assets.
- Charges from capital - Some or all of the strategy's charges are taken from capital. Should there not be sufficient capital growth in the strategy this may cause capital erosion.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This marketing communication is intended for investment professionals and is not for the use or benefit of other persons, including retail investors.
This communication is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Initial charges are likely to have a greater proportionate effect on returns if investments are liquidated in the shorter term.
Past performance is no guide to the future. Company examples are for illustrative purposes only and are not a recommendation to buy or sell. Quoted yields are not a guide or guarantee for the expected level of distributions to be received. The yield may fluctuate significantly during times of extreme market and economic volatility. Awards and ratings should not be taken as a recommendation.
The views expressed are those of the author at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information provided but no assurance or warranties are given.
Issued by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.
*In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong). In Singapore, institutional and accredited investors as defined in the Securities and Futures Act (Cap. 289) of Singapore.