Cabot Research: Re-engaging
Five years on from the initial consultation with Cabot Research, the Jupiter Value Equities team examine how the changes they implemented across their strategies have affected performance
In April 2022, Dame Katharine Grainger, one of the most decorated British Olympic athletes of all time, and Head of Sport UK came to speak at Jupiter. She believes that in order to improve, you have to be aware of and focus on weaknesses. However, you cannot only focus on weakness, but must acknowledge strengths and use them efficiently.
As fund managers, we are in the privileged position of investing assets on behalf of our clients. We understand that this involves a great deal of trust and as such we want to do the best possible job we can. This means identifying our strengths and weaknesses and trying to improve where we can.
In 2016 we engaged a US-based independent company, Cabot Research, to undertake a review of our portfolio construction. The aim of Cabot Research is to help equity fund managers improve portfolio performance by analysing historical data. This produces statistically significant analysis which attempts to identify any behavioural biases fund managers may exhibit. Cabot were sent 8 years of daily fund holdings and transactions, and following the review they broke down the relative performance data of the Jupiter UK Special Situations Fund into 3 predominant sections:
- Buying
- Sizing
- Selling
The data showed that the team’s buying process was strong. We were in the top decile of all fund managers Cabot had researched. This means we were getting the buying part correct, that is the identification of lowly valued stocks which outperform over time. We identify these stocks by using our disciplined and structured investment process which involves screening (Graham & Dodd and Greenblatt), financial modelling (focus on balance sheet strength and conversion of profits into cash) and qualitative analysis.
The selling and sizing however detracted from relative returns. Sizing had the single biggest negative impact as we demonstrated a behaviour called “Regret Aversion”. This is the tendency to not reach a full position in the portfolio in a timely manner. Cabot’s analysis showed that rectifying this would have the biggest impact on fund performance.
Selling also detracted. We demonstrated a behavioral bias called “Endowment Effect”, meaning we had a tendency to hold onto our winners for too long. Finally, our cash holding, which averaged c.10% per annum, despite being beneficial in some years (2007/ 2008), on average detracted from overall performance.
| Breakdown of Skill 8 years to 2016 | Relative performance Breakdown (+4.7%) |
| Buying | +6.6% |
| Selling | -0.4% |
| Sizing | -1.4% |
Following the work we undertook with Cabot we implemented 4 portfolio constructions rules into the two UK value strategies (Jupiter UK Special Situations Fund and Jupiter Income Trust). The findings came back prior to the launch of our global value strategies which were therefore launched with these rules being implemented from the start (SICAV in 2016 and UT in 2018);
- Initial Position size: Initial weight to be approximately 2% within the first 3 months of opening the position, dependent on liquidity and capacity constraints.
- Cash: Reduce our overall exposure to cash. Target exposure to be c. 4%, unless the median G&D P/E of the market is greater than 22x.
Significant Losers: a minimum weight will prompt a decision to be made regarding selling or adding to the holding. - Review long term winners: review any long-term winner that have been in the portfolio more than 3 years.
The main purpose of engaging with Cabot was to identify areas we could improve, so whilst we found the process incredibly interesting, we wanted to see if the changes would have a material benefit to the performance of the funds.
In order for the data to be statistically significant there needed to be approximately 5 years’ worth of data points. Therefore, as soon as we reached this milestone, we re-engaged with Cabot (who have subsequently been purchased by Factset) and went through the same process to understand whether the portfolio construction rules that we implemented in 2016 had benefitted the performance of the value strategies.
This time Cabot reviewed the 5 years post the implementation of the portfolio construction rules and 5 years prior, to compare the same amount of time and what impact, if any, the rules have had.
The results
We are very pleased to report that the portfolio construction rules have benefited the performance of the funds. Although the profile of the strengths and weaknesses remains the same, there have been some notable improvements. Below we have highlighted the breakdown of the skills:
| Jupiter UK Special Situations | 5 years prior to Cabot rules (2011 - 2016) |
Since Cabot rules 5 years to May 2022 |
| Relative returns p.a. | +3.8% | +1.1% |
| Buy | +4.4% | +0.3% |
| Sell | +0.3% | +1.3% |
| Sizing | -0.8% | -0.5% |
Notably the buying process has come down, but this has been impacted by the significant headwind we have seen of value underperforming growth. The last 5 years has been one of the worst on record for our style of investing. This has directly impacted the buying factor, however it’s the part of the process we were strongly advised not to change, as it had previously proved to be very strong (as long as our style isn’t significantly out of favour).
The areas we have direct control over (investment style aside), are selling and sizing which have both improved. Selling has improved from 0.3% per annum for the 5 years prior to the rules, to 1.3% per annum post the rules. This means we have been more active in selling our positions once they have performed well or selling if they are not improving.
Sizing, which was the biggest detractor, and remains a negative overall, has reduced from -0.8% to -0.5% per annum. So, whilst we still have work to do and improvements to make, these rules have benefited the performance of the strategies.
The changes have also led to turnover of the funds increasing. Turnover has gone from 35% to 39%, meaning that we are entering and exiting positions in companies more frequently. The vintage of the holdings have also changed. From 2012 to 2016, 40% of the portfolio was 3 years or older, now over 50% of the portfolio is less than a year old. During our original engagement with Cabot, they reported we made the best returns within the first 18 months of investing in a company, so increasing the recycling of the capital has led to better returns.
Global Value Funds
With the global value strategies, there is only 1 set of data to review, which is the 5 years since the portfolio was launched. From inception, the strategy was launched with the same portfolio construction rules as highlighted above.
Our global value strategy was launched in 2016, since then we have seen one of the most difficult 5-year performance periods for value on record, and a very challenging time period to launch such a strategy. Therefore, as would be expected the buying part of the process detracted from returns. To put this into context, over the 5 years to May 2022, the fund returned 38.7% against a rise of 53.9% for the MSCI ACWI. Over that same time period, the MSCI ACWI Growth Index returned 72.6% and the MSCI ACWI Value Index returned 39.8%, an underperformance of 32.8%, highlighting the extraordinarily difficult environment for value investing. Despite that, the rules have meant that both the sizing and selling have contributed positively to returns. The selling part of the process added +0.5% per annum to returns and sizing added +0.8% per annum to returns.
| Jupiter Global Value | Since Cabot Rules 5 years to May 2022 |
| Relative returns p.a. | -1.1% |
| Buy | -2.2% |
| Sell | +0.5%% |
| Sizing | +0.8% |
During our first engagement with Cabot, they noted that cash was a detractor overall. This time they reported that the level of cash had not made any significant impact, so whilst it hadn’t detracted, it also hadn’t contributed meaningfully to returns.
Further changes
Whilst we are pleased to report that the portfolio construction rules have overall been positive, we still have further improvements to make on the sizing and selling parts of portfolio construction and will continue to work with Cabot to ensure this happens.
Cabot also provide a prompt as to which companies may be worth reviewing based on their portfolio construction rules. We will use this prompt at our monthly portfolio construction review to ensure we continue to address the selling and sizing recommendations.
Conclusion on our work with Cabot
The performance headwind to get to this point has been extreme, however we have been using this period to refine our portfolio construction. Now that we have these rules in place and once our style begins to recover, we hope these changes we have made will further help to benefit returns for our clients.
Patterns of performance – the need for patience
When speaking to clients we always highlight that in order to be a value fund manager, and indeed a client, patience is required. Whilst our style of investing has proven to work over the long term, it’s not true of the most recent short term. It is important to remember that sentiment can change quickly and the market can move fast. The first half of 2022 has seen a dramatic shift back in favour of value investing; however, this follows one of the worst 5-year periods for the style. We cannot say if this will continue over the short term. A lot comes down to the point at which the data is cut, as individual months can have a big impact.
Looking back to move forwards
We wanted to look at the data of our funds and see what the long-term impact has been.
Focusing on the Jupiter UK Special Situations Fund, which has the longest track record, we have achieved an outperformance of +2.3% per annum (net of fees) for our clients since 2006. This is a good return that we believe most clients would be pleased with, however when analysing this further, the returns are not as regular as the headline number suggests. Looking at the returns on a rolling monthly basis, over 3 and 5 years:
Over a 3 year rolling basis since 2006, 57% of the time we have a achieved a return of 2% per annum ahead of the FTSE All Share benchmark, and over a 5 year rolling basis this number increased to 61%.
What this means in practice is that, in order to achieve good long-term returns which the investment style is capable of producing, value investors and their clients need to accept that they will spend a significant portion of their investment lives failing to achieve short-term performance targets.
Our view remains that you shouldn’t let this disappointment change what you are doing over the short term or you will be sacrificing good long-term returns. Therefore, this style of investing remains best-suited for clients who have a long-term investment time horizon and the patience to withstand short-term volatility.
12-month rolling performance (%)
| 01 Aug '17 to 31 Jul '18 | 01 Aug '18 to 31 Jul '19 | 01 Aug '19 to 31 Jul '20 | 01 Aug '20 to 31 Jul '21 | 01 Aug '21 to 31 Jul '22 | |
| Jupiter Global Value D USD Acc | 16.0 | -10.4 | -8.6 | 43.6 | -8.5 |
| MSCI ACWI NR USD | 11.0 | 2.9 | 7.2 | 33.2 | -10.5 |
| 01 Aug '17 to 31 Jul '18 | 01 Aug '18 to 31 Jul '19 | 01 Aug '19 to 31 Jul '20 | 01 Aug '20 to 31 Jul '21 | 01 Aug '21 to 31 Jul '22 | |
| Jupiter UK Special Situations Fund | 7.2 | -1.3 | -21.2 | 34.7 | 7.9 |
| FTSE All-Share | 9.2 | 1.3 | -17.8 | 26.6 | 5.5 |
| IA UK All Companies | 8.6 | -1.2 | -14.5 | 32.0 | -4.5 |
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.
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