A notable feature of markets in 2022 is that not only equities but also bond markets have fallen. By the end of August, the MSCI World Index had lost 17.8%, and the Bloomberg Global Aggregate index, an index of investment grade government and corporate bonds, had shed an alarming 15.6%. Investors who had sought diversification by the traditional approach of combining equities with only bonds in their portfolio (in the belief that if equities fell, bonds would remain solid) found themselves lacking a safe haven.  

In 2022 bonds have failed to provide diversification

Chart 1

Source: Morningstar, Jupiter, as at 31.08.2022. 

The root cause of the cross-asset class turmoil so far this year was the volte face by the US Federal Reserve (Fed). Having been slow to raise interest rates when inflation was a threat rumbling in the distance, the Fed then changed its mind and hiked rates suddenly as the storm broke. The suddenness of the shift sent both bonds and equities into a tailspin.

 

Yet some alternative assets have remained positive, and investors who included these in their portfolios enjoyed true diversification and better outcomes. The Jupiter Merian Global Equity Absolute Return (GEAR) and the Jupiter Strategic Absolute Return Bond (SARB) strategies both performed very differently from equity and bond markets. Both are market neutral strategies, holding a long book and a short book in balance. Both have low volatility targets.  

GEAR and SARB provided diversification 

Chart 2

Past performance is no indication of current or future performance.
Cumulative return, YTD, of Jupiter Merian Global Equity Absolute Return (GEAR) (I USD Acc) and Jupiter Strategic Absolute Return Bond (SARB) (I USD Acc).

 

Source: Morningstar, Jupiter, as at 31.08.2022. 

Don’t put all your eggs …  

Market downturns are of course always difficult to predict. The best time to establish a truly diversified portfolio is not after a sharp market fall, but before it. Although we cannot predict when the next downturn will occur, it is reasonable to expect further turmoil over the long term. Inflation, for example, is notoriously difficult for central banks to control, and aggressive attempts to do so can cause recession.

 

Notwithstanding the economic backdrop, we should be forewarned that financial markets are volatile, and often defeat expectations. There is a growing body of academic research1 emphasising that financial markets are not in a state of equilibrium but are highly dynamic, complex systems, prone to volatile behaviour. A complex system is one where a small change in current circumstances can lead to large deviations in the future: the well-known butterfly effect. Research has shown that equity market returns are statistically “fat tailed” (leptokurtic), suffering extreme losses more often than would be the case were they normally distributed (Gaussian) systems. In this case, the academic research chimes with common sense: market participants know intuitively that prices can easily spin out of control.

Uncorrelated returns  

Correlation, a statistical relationship between two securities, measures how much they have moved together. Highly correlated securities (near to 100%), have moved up and down together. Securities with low correlation (near to 0%), have moved independently: one sometimes up when the other is down. Two securities that are negatively correlated (near to -100%) have moved in opposite directions, one up when the other is down. Adding uncorrelated and negatively correlated assets to a portfolio increases the benefit of diversification, tending to reduce overall risk.

 

Both the Jupiter Merian Global Equity Absolute Return (GEAR) and the Jupiter Strategic Absolute Return Bond (SARB) strategies have historically offered a good source of diversification. Both have had low correlation to both equities and bonds markets. In the 13 years since GEAR’s inception, the strategy has had a low correlation with the MSCI World index. In the eight years since SARB’s inception, it has mostly had a low correlation to the Bloomberg Global Aggregate index.  

Chart 3

Past performance is no indication of current or future performance. GEAR is the Jupiter Merian Global Equity Absolute Return Fund (I USD Acc).
Three month rolling correlation of the Fund against the MSCI World NR index since inception of the Fund, which was 30.06.2009.

 

Source: Jupiter, as at 31.08.2022.  

Chart 4

Past performance is no indication of current or future performance. SARB is the Jupiter Strategic Absolute Return Bond Fund (I USD Acc).
Three month rolling correlation of the Fund against the Bloomberg Global Aggregate index, since the inception of the Fund, which was 30.05.2014.

 

Source: Jupiter, as at 31.08.2022. 

The graphs above show rolling correlation: taking three-month periods of daily returns from the strategy and the index, measuring their correlation, rolling the data forward one day, measuring the correlation again, and so on, to produce a time series. Correlation can also be calculated as an average over the whole period, as in the two matrices below, where some other indices are also shown. The upper matrix is from the inception date of GEAR, and the lower from that of SARB.  

Chart 5

Date range: 30.06.2009-31.08.2022. GEAR is Jupiter Merian Global Equity Absolute Return Fund (I USD Acc). SARB is Jupiter Strategic Absolute Return Fund (I USD Acc). Correlation with monthly frequency. Source: Morningstar, Jupiter, as at 31.08.2022. 

Chart 6

Date range: 30.05.2014-31.08.2022. SARB is Jupiter Strategic Absolute Return Fund (I USD Acc). GEAR is Jupiter Merian Global Equity Absolute Return Fund (I USD Acc). Correlation with monthly frequency. Source: Morningstar, Jupiter, as at 31.08.2022. 

A more resilient portfolio  

What is the effect of adding assets with low correlation to a portfolio of equities and bonds? The chart below shows the cumulative returns over three years to 31 August 2022 of three portfolios. The poorest performing was the ‘traditional’ portfolio, shown in dark blue, a 60%-40% allocation to the MSCI World index and the Bloomberg Global Aggregate index. The other two portfolios show the effect of adding the GEAR and SARB strategies, in one case entirely substituting them for bonds. Both portfolios that included GEAR and SARB outperformed the traditional 60-40 portfolio.   

Chart 7

Past performance is no indication of current or future performance. Three-year period to 31.08.2022. Source: Jupiter, Morningstar as at 31.08.2022. 

Different investment processes   

GEAR and SARB have quite different investment processes. The GEAR team’s systematic model analyses the fundamentals of thousands of stocks every day, looking at several aspects of each stock such as its value, quality and growth. The GEAR team does not undertake macroeconomic analysis. SARB, by contrast, is a macro fund. The SARB team digs deeply into major economic trends, such as GDP growth, inflation and central bank policy, forming judgments about prospects for currencies, bonds, and interest rates. The difference between the two processes is partly due to the personal background of each team, but it is worth noting that large amounts of data are easier to obtain in the equities than the bond market. A systematic (computer-driven) approach is easier to implement in equities (GEAR) than in bonds (SARB).

 

Although they have different investment processes, both strategies have achieved positive returns, including in down markets. The low correlation of these returns with equity and bond markets suggests their long-term addition to portfolios could have a beneficial diversifying effect.  

1 See T. Aste and T. Di Matteo, Introduction to Complex and Econophysics Systems: a navigation map Lecture Notes in Complex Systems Vol.9 (World Scientific, Singapore 2010) 1-35. Professor Di Matteo of King’s College London is a consultant to the GEAR strategy.
Performance
Jupiter Merian Global Equity Absolute Return Fund (I USD Acc)

Past performance is no indication of current or future performance, and does not take into account commissions and costs incurred on the issue/redemption of shares. Returns may increase or decrease as a result of currency fluctuations.

 

Source: Morningstar, NAV to NAV, gross income reinvested, net of fees, in USD, to 31.08.22.

Portfolio features

Jupiter Merian Global Equity Absolute Return Fund 

Fund objective: Capital growth, while closely controlling risk. The fund also aims to deliver an absolute return (above zero) performance, irrespective of market conditions) over rolling 12 month period. 

Structure: UCITS

SRRI 4                                                                                                                                Jupiter Merian Global Equity Absolute Return Fund Risk logo

Fund risks

  • Investment risk – there is no guarantee that the Fund will achieve its objective. A capital loss of some or all of the amount invested may occur. Furthermore, the Fund may exceed its volatility limit. A capital loss of some or all of the amount invested may occur.
  • Company shares (i.e. equities) risk – the value of Company shares (i.e. equities) and similar investments may go down as well as up in response to the performance of individual companies and can be affected by daily stock market movements and general market conditions. Other influential factors include political, economic news, company earnings and significant corporate events.
  • Derivative risk – the Fund uses derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.
  • Currency risk – the Fund can be exposed to different currencies and may use techniques to try to reduce the effects of changes in the exchange rate between the currency of the underlying investments and the base currency of the Fund. These techniques may not eliminate all the currency risk. The value of your shares may rise and fall as a result of exchange rate movements.
  • Stock connect risk – the Fund may invest in China A-Shares through the China-Hong Kong Stock Connect (“Stock Connect”). Stock Connect is governed by regulations which are untested and subject to change. Trading limitations and restrictions on foreign ownership may constrain the Fund’s ability to pursue its investment strategy.
  • The fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus. 
  • The fund may be subject to various other risk factors, please refer to the latest sales prospectus for further information. The KIID and Prospectus are available from Jupiter on request. 

Source: Jupiter.

Synthetic Risk Reward Indicator (SRRI) is based on past data, may change over time and may not be a reliable indication of the future risk profile of the Fund.

The lowest category does not mean ‘no risk’. Please see the KIID for further information. Synthetic Risk Reward Indicator (SRRI) as per the most up to date KIID (10.02.22).

Performance 

Jupiter Strategic Absolute Return Bond

Past performance is no indication of current or future performance, and does not take into account commissions and costs incurred on the issue/redemption of shares. Returns may increase or decrease as a result of currency fluctuations.

Source: Morningstar, NAV to NAV, gross income reinvested, net of fees, in USD, to 31.08.22.


This shareclass has an extended track record based on the F1 USD Acc shareclass. Performance since 18.04.18 is for the I USD Acc shareclass. Performance since 30.05.14 and until 17.04.18 is for the F USD Acc shareclass. The benchmark since 25.05.17, the fund’s benchmark changed from the JP Morgan Global Government Bond Index  USD hedged, to cash (USD Fed Funds Effective Overnight Rate). On 01.05.15 the fund’s benchmark changed from the Intercontinental Exchange Bank of America US Dollar one month deposit bid rate, to the JP Morgan Global Government Bond Index USD hedged. **Since inception: 30.05.14. ***Since FM start: 01.08.16.

Portfolio features

Jupiter Strategic Absolute Return Bond Fund overview

Fund objective The objective of the Jupiter Strategic Absolute Return Bond Fund is to seek to deliver positive total returns on a rolling twelve month basis with stable levels of volatility uncorrelated to bond and equity market conditions. Investors should be aware that their capital is at risk and that there is no guarantee that the positive total returns will be achieved over the rolling twelve months or any time period.  

Benchmark Federal Funds Effective Overnight Rate

Structure ICVC

SRRI 4                                                                                                                                Jupiter Strategic Absolute Return Bond Fund Risk logo

Fund risks

  • Investment risk – while the Fund aims to deliver above zero performance irrespective of market conditions, there can be no guarantee this aim will be achieved. Furthermore, the actual volatility of the Fund may be above or below the expected range and may also exceed its maximum expected volatility. A capital loss of some or all of the amount invested may occur.
  • Emerging markets risk – less developed countries may face more political, economic or structural challenges than developed countries.
  • Credit risk – the issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due. Bonds which are rated below investment grade are considered to have a higher risk exposure with respect to meeting their payment obligations.
  • CoCos and other investments with loss absorbing features – the Fund may hold investments with loss-absorbing features, including up to 20% in contingent convertible bonds (CoCos). These investments may be subject to regulatory intervention and/or specific trigger events relating to regulatory capital levels falling to a pre-specified point. This is a different risk to traditional bonds and may result in their conversion to company shares, or a partial or total loss of value.
  • Bond Connect Risk – The rules of the Bond Connect scheme may not always permit the Fund to sell its assets and may cause the Fund to suffer losses on an investment.
  • Interest rate risk – investments in bonds are affected by interest rates and inflation trends which may affect the value of the Fund.
  • Liquidity risk – some investments may become hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.
  • Derivative risk – the Fund uses derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.
  • Currency risk – the Fund can be exposed to different currencies. The value of your shares may rise and fall as a result of exchange rate movements.
  • The Fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus
  • The fund may be subject to other various risk factors, please see the Prospectus for more information. The KIID and Prospectus are available from Jupiter on request 

Synthetic Risk Reward Indicator (SRRI) is based on past data, may change over time and may not be a reliable indication of the future risk profile of the Fund. The lowest category does not mean ‘no risk’. Please see the KIID for further information. Synthetic Risk Reward Indicator (SRRI) as per the most up to date KIID (10.02.22).