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Have you ever watched in awe at the fingers of a professional pianist, as they flit across the ivories like butterflies? Whilst many composers at times chose to limit themselves to just a few octaves, when the mood changes and the full breadth of the keyboard is used, the result can be a masterpiece.

There are parallels with investment. At times, market conditions – and therefore the sorts of strategies, sectors and companies that thrive – stay in a narrow range. For example, ‘growth’ stocks, typified by US tech titans, have led the charge for many years, capitalising upon a long era when interest rates have been near zero, inflation muted, and asset prices underpinned by central banks through quantitative easing.

This year, however, the tune played by pure ‘growth’ investors has become discordant as this style has struggled in the face of changing market circumstances. Inflation on the one hand and the horrifying invasion of Ukraine on the other have brought about a sudden shift, as hard and soft commodity prices (most obviously energy and food) soar higher than they have for years, handing market leadership to companies involved in extracting and delivering those vital goods to consumers.

Likewise, defence stocks have rallied to the extent that funds that exclude the sector are suffering. From an ESG perspective, I question whether the attitude towards blanket exclusion of commodities – so vital for our everyday existence – and defence providers may now be shifting? To quote Oliver Shah in The Times, “it is perfectly ethical for states to reinforce themselves against tyranny”1. As we witness the determination and heroism of Ukrainians to resist the military might of Russia, who could disagree?
The asset management industry’s duty of care
An exclusionary approach to ESG investing typically skews portfolios away from ‘dirty’ sectors (e.g., oil, gas, mining), ‘sin’ sectors (e.g., tobacco, alcohol, pornography), weapons and so on, writing off over 8% of the global equity universe2. Not only does this deny capital and governance to these sectors, but as we’ve seen this year it can also present a major relative performance risk. According to Morningstar, almost 40% of assets managed in EU-domiciled funds are now in vehicles marketed as sustainable.3 Are investors who have embraced these exclusions aware of these downsides?

That does not mean that we don’t admire and applaud ‘impact’ investors, who support young, pioneering, often profitless companies whose innovation and technologies will, we fervently hope, pave the way for us all towards a more sustainable future. These investors prioritise making a positive impact via their investments over the returns they receive. We need these altruistic investors and scientific geniuses to help right the wrongs we humans have wrought on the planet we dominate.

However, we believe the asset management industry has a duty of care to clients to be crystal clear with regard to how ‘green’ a particular strategy is, and what the potential performance impact could be. For example, the Jupiter Merlin Portfolios that our team manage are not labelled ‘impact’, ‘sustainability’ or ‘ESG’ and we typically avoid funds with formal sectoral exclusions. However, we integrate ESG fully, thereby allowing the Portfolios to capture outperformance across the full breadth of the markets keyboard, thereby also delivering a smoother investment return.
The virtue of traditional active stewardship
Our clients whose precious savings we have the honour and responsibility of investing in the Jupiter Merlin Portfolios have explicit financial return priorities: they expect us to deliver these consistently over time after fees, but also to do so in a responsible way. We meet these objectives via what we call ‘embedded’ or ‘integrated’ ESG through active stewardship.

We believe active stewardship makes use of the rights and responsibilities of share ownership to influence companies. In other words, to not be an absentee landlord. As shareholders (part-owners, let us not forget) of a company, or lenders to a company via bonds, an active investor can encourage and empower company management to spend, innovate and move their company towards a more sustainable future via engagement and voting. This doesn’t just mean an oil company developing its own carbon capture technology, but also textile companies reducing river pollution from dye, consumer goods companies reducing use of plastics, and so forth.

Implementing effective active stewardship is only practical via active managers working with a concentrated list of holdings, rather than the hundreds or thousands typically held within passive funds. It takes time, expertise, skill and patience! The active equity funds held within the Jupiter Merlin Portfolios owned, on average, 45 stocks for over 9 years (on a weighted basis).4 We challenge managers to demonstrate how they effect change at the company level, delivering real world impact to all stakeholders and financial uplift to unit holders. It is a virtuous circle: the former causes the latter.

We believe that realising the benefits of active stewardship is best achieved across an unrestricted investment universe and that the validity of this approach has been heightened by the war in Ukraine.
Jupiter Merlin Portfolios fund specific risks
The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. 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.

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.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information