Jupiter's growth is undervalued

Jupiter is a popular choice with investors, with net mutual fund inflows of £458m in the three months to December representing the sixth successive quarterly inflow, and bringing the total inflow for 2013 up to an impressive £1.2bn. And investor confidence is well-placed, with around two-thirds of mutual funds under management achieving first and second quartile investment performances. These inflows are underpinning both earnings and dividend growth. Analysts at Numis forecast that from 2011 to 2015, the dividend yield could more than double. Societe Generale goes one step further, forecasting a 2015 payout of 18.5p - a yield of 5 per cent on the current share price.

Jupiter has also built up a sophisticated relationship with key distributors to attract retail interest, and while the UK remains the principal revenue driver, the international side is growing strongly and contributes around 10 per cent of all mutual funds under management. New managers have been hired in Hong Kong as well as in Europe where there are plans to expand distribution in Germany, Austria and Switzerland. Interestingly, chief executive Edward Bonham Carter announced his decision to stand down after 14 years to become vice chairman, and his successor Maarten Slendebroek was formerly distribution and strategy director.

And while it's important for the business's success that Jupiter's funds achieve strong investment returns, there is very little reliance on performance fee income, which in the first six months of last year brought in just £500,000 compared with income from initial charges of £12.3m and management fee income of £178.9m. The strong focus on management fees charged as a percentage of funds under management provides a vital cushion should equity markets lose ground. Analysts at RBC Capital Markets estimate that a 5 per cent negative investment variance could lead to a 2 per cent net outflow of funds with a proportionate effect on fee income.

The lion's share of Jupiter's funds comes from retail investors where the appetite for investing in equities has been improving. This retail exposure is the foundation of a structural growth opportunity linked to changes in the pensions sector. As institutionally-managed defined-benefit schemes disappear and are replaced by defined-contribution schemes, it is expected that more individual pension contributors will take a greater interest in their investments. This could lead to Jupiter, with its well polished distribution network, attracting a significant chunk of that business.

Jupiter's business model is generating a lot of cash to fund dividend increases and Numis is forecasting a net cash pile in 2015 of nearly £250m. In addition to this, there have been rumours that Jupiter may have received an unsolicited bid of £50m for the private client division - some 7 per cent of assets under management - which Numis believes could make it possible to pay a special dividend of up to 11p a share.

In valuation terms, while Jupiter's trade on an about-average multiple of forecast earnings (see table) once long-term (five-year) growth rates are factored in, it is the cheapest FTSE 350 asset manager by some margin on a price-to-earnings-growth ratio (PEG) basis. Indeed, adjust for cash and the forward PEG drops to below 0.9. That looks cheap.

Source: S&P Capital IQ

*Based on consensus forecasts