After everything that happened in 2020, it’s easy with hindsight to marvel about how upbeat many investors were a year ago. With an emboldened new UK government promising to “get Brexit done”, accommodative central banks, and signs of cooling in the trade war between China and the US, the grab for yield was evident across all markets and Sterling investment grade credit was no different. Against the backdrop of a euphoric market, we were more circumspect. Of course we couldn’t know that Covid-19 would turn into a full-blown global pandemic, but even aside from the novel coronavirus we felt that expensive credit spreads didn’t reflect that the credit cycle was long in the tooth or the significant macro-economic risks to the outlook which we were becoming increasingly concerned about.
Sticking to our principles
Pragmatism and risk discipline have been core to our management approach for Jupiter Corporate Bond Fund since we took it over in May 2018. In a market environment where credit spreads did not provide adequate compensation for the inherent risk, we moved to rotate 18% of the portfolio into AAA bonds as ballast and a source of liquidity and patiently waited for valuations to become more attractive.

Plainly that repricing of risk happened more quickly than we had anticipated as the pandemic wrought considerable economic damage across the globe. But it also became clear to us, after credit spreads dramatically widened in March, that governments and central banks would move swiftly to shore up confidence, support economies and credit markets in particular. Given our cautious positioning and strong fund liquidity, we had the ability and conviction to take advantage of market dislocation and buy bonds at prices that we felt over the course of a cycle would prove to be excellent value for the fund.

Credit spread evolution
Covid-19 sell off presented attractive opportunities to add spread risk

Credit spread evolution

Source: Bloomberg, as at 31.07.2020

Active, pragmatic, and risk aware
This proved to be a very timely rotation of our risk positioning, and the fund’s returns reflect that: during 2020 the fund returned 12.55% versus 7.86% for the IA Sterling Corporate Bond sector, and 24.40% versus 17.06% since we started running the fund.1 This reflects a consistent investment process which strives to deliver best in class risk adjusted returns.

We are part of a large, fixed income team at Jupiter, covering the whole global bond universe. This team dynamic is invaluable in helping us to monitor the global macroeconomic backdrop, understanding the rates cycle and appreciating the broad credit trends in the market. That top-down macro context is combined with our bottom-up intensive credit research that gives us conviction on which companies to own. We both have a strong background in high yield credit research, where due diligence is absolutely paramount, and we apply those principles just as stringently to investment grade credit.
Active, pragmatic, and risk aware
Underpinning the risk profile of the fund is our “2-in, 1-out” policy when it comes to security selection. This means that for a name to enter the portfolio we both need to sign off on it, but if either one us subsequently loses conviction in the idea then the position is sold. We find that this approach acts as a “safety valve”, bringing a strong, disciplined structure to our credit selection. That high conviction, active approach is reflected in the flexibility we apply to the fund’s positioning. We are style agnostic – neither inherently aggressive or defensive – we let our in-depth assessment of the macro environment and our bottom up analysis guide the construction of the portfolio and the level of risk we feel comfortable with at any given time in the cycle. This flexibility means that, since taking over the fund, we have been able to consistently add alpha in risk-on and risk-off environments.
Jupiter Corporate Bond Fund alpha generation

Past performance is no guide to the future. Source: Fund and sector returns from FE FundInfo, in GBP, from 30.04.18 to 31.12.20; ICE BofA Sterling Corporate Index spread to worst from Bloomberg. Fund performance data is calculated on a NAV to NAV or bid to NAV basis dependent on the period of reporting, all performance is net of fees with net income reinvested. Target benchmark: IA Sterling Corporate Bond. Note: Alpha is the difference between return of fund and the sector.

Finally, the active management of risk is central to our approach. We look to add risk to the portfolio when the macro environment and credit valuations are conducive to that positioning but will reduce risk as credit pricing moves beyond our assessment of fair value. We are prepared to forego the last few basis points of a rally in order to position the fund ahead of market volatility and protect investors against the risk of drawdown. The fund’s sector-leading Sharpe and Sortino ratios (see below) reflect that this disciplined approach to risk and return is at the heart of our process.
If that’s where we’ve been, then where are we going?
If the early part of 2020 was about de-risking and the summer months into early autumn was about being more positive as valuations looked attractive, then what might the future hold? If you are excited about Covid vaccines or moving beyond the Brexit saga, we don’t want to burst your bubble … but when it comes to investment grade credit we think that a lot of optimism is already in the price. Reflecting our pragmatic approach, given where valuations stand today, we are looking to cut risk in the portfolio. It isn’t a sign that we think 2021 will necessarily bring more doom and gloom. We simply feel that the pricing of risk has come full circle, from expensive to cheap, back to what we consider as expensive again. As such we have been buying our preferred, higher-quality, defensive names, while maintaining exposure to those areas of the market that we feel can still rally further. As always, as the macro environment changes then our fund positioning will evolve. Because when it comes to investing in sterling investment grade credit, we’re pragmatic rather than dogmatic.
1 Past performance is no guide to the future. Source: Morningstar, NAV to NAV, gross income reinvested, net of fees, Jupiter Corporate Bond Fund I Acc, in GBP, from 31.12.19 to 31.12.20 and 30.04.2018 to 31.12.20. Comparator: £ Corporate Bond

Performance

Rolling performance

Risk metrics

Past performance is no guide to the future. Fund performance data is calculated on a NAV to NAV or bid to NAV basis dependent on the period of reporting, all performance is net of fees with net income reinvested. Source: Morningstar, NAV to NAV, gross income reinvested, net of fees, Jupiter Corporate Bond Fund I Acc, in GBP, to 31.12.20. *Fund launched on 25.05.98. **Current fund manager start date: 30.04.18. IA = The Investment Association. ***Sharpe ratio and Sortino ratio are annualised figures using monthly returns. Risk free rate of 0.5%. Target benchmark: IA Sterling Corporate Bond TR.
Fund-specific risks
The fund can invest up to 20% in non-rated bonds. These bonds may offer a higher income but carry a greater risk, particularly in volatile markets. In difficult market conditions, it may be harder for the manager to sell assets at the quoted price, which could have a negative impact on performance. The fund may use derivatives which may result in large fluctuations in the value of the fund. Counterparty risk may cause losses to the fund. In extreme market conditions, the Fund’s ability to meet redemption requests on demand may be affected. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. This fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state.

Important information