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Hiding in cash: Jupiter Second Split's self-inflicted wounds

Jupiter Second Split is one of my most disappointing investments - not because it is the worst performing, but because I cannot see any light at the end of the tunnel, writes James Carthew.

 
Hiding in cash: Jupiter Second Split's self-inflicted wounds

Back in 2009 many investors were very concerned about the stability of the financial system and absolute return funds were in vogue.

I was wary about missing the recovery from the credit crunch then but towards the end of 2010 I invested some money with Troy (in Personal Assets and the Trojan Fund ) and put some money into the geared growth shares of Philip Gibb’s Jupiter Second Split trust (JSS) (splits issue two or more different types of share).

Today I am quite happy with the Troy investments; they have not kept pace with markets but they have delivered decent absolute gains with low volatility. JSS however I would categorise as one of my most disappointing investments – not because it is the worst performing but because I cannot see any light at the end of the tunnel.

JSS was the successor trust to Jupiter Split. Under Philip Gibb’s stewardship Jupiter Split grew its assets by almost 50% between its launch in May 1998 and October 2004 when it was rolled over into JSS.

In November 2004 JSS’s share capital consisted of zero dividend preference shares (which offer no income but a fixed return at a pre-agreed date) and geared growth shares but it also traded as package units with, initially, each package unit being 60:40 zeros: geared growth shares.

The benchmark was 75% FTSE All-Share and 25% FTSE World ex-UK. JSS performed quite well until the credit crisis hit and then the manager adopted a defensive stance which paid off as markets fell in 2008.

In 2009 JSS was approaching the end of its life and the Board put forward reconstruction proposals to shareholders. Geared growth shareholders had done well over the first five and a half years of JSS’s life (their net asset value, NAV, was up about 75%) and the manager said he would have a substantial personal investment in the reconstructed fund. Consequently Jupiter was able to expand the trust. However, crucially, the benchmark was changed to 3 month sterling LIBOR (the interest rate at which banks offer to lend to each other).

LIBOR might have the attraction of being an absolute return target but beating LIBOR does not guarantee you absolute returns in real terms. Over the three years since the reconstruction to the end of the fund’s accounting year in October 2012 the packaged units returned 10% vs. 2.3% for the benchmark but inflation over that period was 13.4%.

Worse than that, holders, like me, of the geared growth shares have seen their asset value fall since the reconstruction – from circa 39.5p to 35.5p today as the returns on the overall fund have lagged the GRY on the zeros.

If you compare JSS’s performance with funds with similar objectives over the same period; Ruffer returned 15.9%, Capital Gearing 30.3%, Personal Assets 33.8%, and Lindsell Train 43.8%.

JSS’s poor returns reflect its portfolio – there is almost nothing in it (68% cash at end of March 2013, 22% in a handful of fixed interest stocks – principally Altria and Barclays Bank, just 10% in equities and a big bet against the euro). This is not a happy state of affairs for JSS and may be the reason, alongside the lacklustre yield of 2.6%, why the geared growth shares trade on a discount of more than 18%.

So am I moaning that JSS has not jumped on the bandwagon and embraced the, possibly irrational, exuberance of the day? No, I am wondering whether having LIBOR as a benchmark has persuaded the board and the manager that returns below inflation and below JSS’s cost of gearing are acceptable.

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5 comments so far. Why not have your say?

Tony Peterson

Jun 06, 2013 at 16:59

All the things you should avoid end in " ..nds".

Otherwise there are real bargains to be picked up out there.

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Ladysaver

Jun 07, 2013 at 14:28

The geared growth shares aren't exactly safe and dull - they're quite risky when the trust also has a fair number of zeros out there. The zeros have done well - not sexy, but then they never pretended to be - and if they go on as they have done so far and redeem at the intended value, they'll return well over twice the rate of inflation. The first Jupiter Split was one of the few split cap trusts unscathed by the splits fiasco as it always did as it should and did not take any risks with zero-holders' capital. This is a very cautious trust and looked like one from the off. IMHO if you wanted safe and sound, you should have bought the zeros.

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terry shead

Jun 09, 2013 at 14:24

I own 14000 shares just hope we are going get a decent divi at the end we are certainly not getting flipping any growth.

Terry Shead

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James P

Jul 12, 2013 at 17:24

An absolute return trust should not be a split capital trust - that's the problem, there will only ever be just enough growth to keep the zeros going and even that is tough. As for the huge amount in cash, I think you will find it is various currencies. I thankfully pulled out sometime ago having inherited the holding to manage.

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terry shead

Jul 13, 2013 at 16:37

Quite agree I hold over 14000 shares I have a lot of time for The manager but he has lost the plot we dont even get a decent dividend and he has is own money in it.

Terry Shead

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