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Why Jupiter bet £8bn on an unheralded equity manager

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Why Jupiter bet £8bn on an unheralded equity manager

Last week’s news that Alexander Darwall is to hand over almost 20% of Jupiter's assets - run in one of its most strategically critical franchises - to a little-known manager is a real headturner.

The business hired Mark Nichols from Columbia Threadneedle in a key piece of 'succession planning' to take on the £7.8 billion Jupiter European and European Growth funds, following an unspecified transition period.

For holders of the funds, which in the European mandate includes Jupiter's biggest single portfolio, that will mean swapping one of the company's most successful managers for a relatively unheralded newcomer.

While clearly competent, Nichols has not yet demonstrated anything like Darwall’s sector-leading ability to consistently generate alpha.

Nichols is no newbie. He was first named manager at BMO Asset Management (then F&C) in 2011 – before joining Columbia Threadneedle in 2016.

Since then he has exclusively run European equities, but arguably played second fiddle to his more celebrated co-manager David Dudding, and was not heavily promoted by the company's sales or media teams.

Click the image below to reveal more performance statistics

In an industry where performance talks loudest his track record shows that he has hardly put a foot wrong however, outperforming both the average manager and equity index in the Citywire Equity – Europe ex-UK sector. The same performance record also hints that he and Darwall are cut from entirely different cloths.

In one of the strongest sectors for active management anywhere in the world - where the average manager invariably betters the index - Darwall has stood head and shoulders above his competition.

His career returns are nothing short of sensational: since the beginning of 2001 he has delivered an average of 291.9% across all the funds he has run in the category - more than three times the average manager’s 91.6% and the index’s 91% gain.

He has outperformed in five of his six complete discrete three year periods since 2001. His only down period came between the start of 2004 and the end of 2006, although the margin of underperformance was so slight his backers likely barely registered it at the time, on a return of 76.5% versus the index’s 77.4% a peer 79.1%.

Click the image below to reveal more performance statistics

What may be the most surprising feature of a full retrospective is that in addition to adding to the upside, Darwall has protected capital on the downside better than anyone in the peer group.

Despite taking a few stock hits in recent years from Provident Financial and more recently Wirecard, over his 18 year career, in all five calendar years when the market has delivered negative returns (2001, 2002, 2008, 2011 and 2018) Darwall has outperformed a falling market and average manager.

He has outperformed in 71% of months when the market has declined and fallen 1.34% less per month on average than the index in down periods.

Conversely on the upside he has outperformed in 43% of months and on average underperformed by 0.44% per month when markets rise.

Further supporting his risk averse credentials is that his volatility is notably less than both the average manager and the index; his annualised standard deviation over his career comes in at 14.5%, versus the average manager’s 15.6% and the index’s 16.4%.

This is actually where the pair are most alike. Nichols has also protected on the downside well, outperforming in 63% of negative months during his tenure.

The scale of the outperformance during down months is 0.25% per period, versus Darwall's 0.96% over the time when their records overlap.

Nichols is slightly stronger on the upside, outperforming in 49% of rising months for an average underperformance of just 0.12% per month; this compares to Darwall’s 47% for an average underperformance of 0.23% over the same time frame.

This appears to be one of the key reasons for the hire: Nichols is a defensively minded manager. The problem for Jupiter's marketing team and fund buyers seeking diversified returms is that so are BlackRock’s Andreas Zöllinger, Fidelity’s Samuel Morse and Janus Henderson’s John Bennett. 

The three all also offer better risk-adjusted returns over the past seven years than Nichols and his co-manager Dudding managed.

Jupiter really need this transition to work. The company's other flagship product, Ariel Bezalel’s Jupiter Dynamic Bond fund, had a year to forget in 2018, and recorded outflows of £4 billion as sentiment turned against sophisticated bond funds.

To say that Jupiter are gambling with nearly a fifth of their £42.7 billion assets is unfair – Nichols replicates what he achieved at Columbia Threadneedle then investors will have little to fear.

But those expecting a direct stylistic replacement will be disappointed, although the truth is a one-for-one substitute doesn’t really exist – Man Group’s Rory Powe has come closest in recent years and the holder of the sector's biggest market share, BlackRock’s Alister Hibbert, who runs more than one in every £10 of the £50 billion held in European Equity ex-UK, is a much higher beta player.

We may see Nichols unshackled as a solo lead manager – however the legacy of Darwall's exceptional record is likely to hang over his first few years like Sir Alex Ferguson at Manchester United.

Perversely, given Nichols downside protection, the best thing for him may be a difficult run for European equities and if the manufacturing data coming out of Germany and Sweden in recent weeks is anything to go on, then that may be just what he’ll get.

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