The macro environment has been tricky this year, and what has made life especially difficult for market participants is that the data has been sending very conflicting signals. Clearly inflation has come down a lot from its peak, but has remained quite sticky around current levels – probably, I would argue, as a result of elevated wage growth due to the tightness of the labour market.

We are seeing labour markets loosen to an extent, but unemployment is still low and the vacancy rate in absolute terms is pretty high, with consumers in the UK and the US now experiencing positive wage growth in real terms. This creates an environment in which central banks find it difficult to make the case for interest rate cuts.

One could speculate for hours about what has caused an apparent disconnect in the economy. The UK, particularly, appears to be suffering a shortage of workers, with the UK labour force still smaller than its pre-pandemic level. It may be that classic second-order effects are also to blame. Wages are a big input into costs, so as wages rise companies are raising prices in order to protect their margins … however workers can endure those prices since their incomes have also risen, and together these factors are driving the stickiness of inflation and the stubbornness of the economy to so far dodge recession.
What goes up might not come down for a while
On the policy side, the message from central banks is still that we are at, or very close to, the top of the hiking cycle. That’s not a surprise in itself, but there was something about the latest ‘dot plot’ released by the Fed that I found quite striking – with just two cuts expected in 2024, the message is clear: we are unlikely to see significant near term cuts unless there is a very meaningful deterioration in the economy.

Is a recession likely anytime soon? Here again you could make a compelling case either way depending on which sets of data you choose to emphasise. Something that has recently surprised us, for example, is the strength of trading updates from companies in the leisure sector – an area where spending is highly discretionary and you’d imagine it would be an early place that signs of recession would appear. All this suggests to me that the current environment of weakish growth and sticky inflation may persist for longer, and that ultimately central banks may have to engineer a recession to return inflation to target levels.
Income generation at moderate risk
As a fixed income investor this creates a challenging market in which to invest, but one in which I believe active investors should be able to add value. I manage the Jupiter Monthly Income Bond Fund, which invests in a blend of investment grade and high yield credit across the breadth of the developed market bond universe. As you might expect from the fund’s name, income generation is key priority when it comes to managing the portfolio, but so too is controlling volatility. The way the benchmark is constructed means the fund is structurally short duration1, and that helps keep a lid on interest rate risk.

Credit selection is also central to the way that both opportunities are pursued and risks are managed in the fund. I have a credit research background, and actually used to head up Jupiter’s team of credit analysts, so understanding the particular characteristics of individual issuers or even individual issues plays a key role in the effort to source attractive levels of income with a moderate risk profile.

Here too the baked-in features of the fund help us avoid pitfalls, as the combination of investment grade and high yield gives the final portfolio some of the characteristics of ‘crossover’ credit, which is a part of the market that historically has had a low default rate. In addition, investment grade and high yield tend to perform differently at different points in the cycle – so, investment grade will tend to underperform in a rising rates environment, whereas high yield will underperform in a more classically risk-off environment. Blending the two will tend to damp down the exposure when each asset class troughs, creating more consistency through the cycle. Furthermore by dynamically shifting between these two asset class the fund can be positioned to take advantages of opportunities in markets, but when I’m more concerned about the outlook the positioning can be more defensive.
A portfolio built for resilience
At present, there is quite a clear defensive bias, with the portfolio built to be resilient in the event of a broader deterioration in the risk environment. Within the high yield book, the fund retains a focus on short duration bond, contributing to an underweight duration versus the benchmark. Where the fund has invested in longer dated high yield issues, there is a bias towards more defensive sectors such as TMT and healthcare to avoid taking undue risks. Within investment grade, meanwhile, the fund is overweight higher quality bonds (i.e. holding some A and AA-rated issues).
1 The Target Benchmark consists 50% of the ICE BofAML 1-5Y BBB Sterling Corporate Index and 50% of the ICE BofAML Sterling High Yield Index.

This is a marketing communication. Please refer to the latest sales prospectus of the sub-fund and to the Key Investor Information Document (KIID), particularly to the sub-fund’s investment objective and characteristics including those related to ESG (if applicable), before making any final investment decisions

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.

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. 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. 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. 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. 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. Capital erosion risk – the Fund takes its charges from the capital of the Fund. Investors should be aware that there is potential for capital erosion if insufficient capital growth is achieved by the Fund to cover the charges. Capital erosion may have the effect of reducing the level of income generated. For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.

Important Information

This communication is issued by Jupiter Investment Management Limited, The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom. Jupiter Investment Management Limited is registered in England and Wales (number: 02949554) and is authorised and regulated by the Financial Conduct Authority (FRN: 171847). The Jupiter Monthly Income Bond Fund (the “Fund”) is a sub-fund of Jupiter Investment Management Series II (an investment company with variable capital incorporated in England and Wales) and is authorised by the Financial Conduct Authority. The Fund can be distributed to the public in the United Kingdom. Jupiter uses all reasonable skill and care in compiling the information in this communication which is accurate only on the date of this communication. You should not rely upon the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. An investor should read the Key Investor Information Document(s) (“KIID”) before investing in the Fund. The KIID and the prospectus can be obtained from www.jupiteram.com in English and other required languages.