High-yielding Jupiter boosted by diversity

We feel the strong post-referendum performance gives added credence to Jupiter's strategy of diversifying its business by geography, client type and asset class since it listed in 2010. But we don't think the shares' huge yield and modest earnings multiple reflects the progress being made or the long-term growth opportunities that should result from the government and companies passing responsibility for pension savings to individuals.

During the past five years, Jupiter has been decreasing its exposure to equities, varying the geography of its invested assets and growing the proportion of non-UK clients it has. At the end of June 2011, 82 per cent of the fund manager's assets were invested in equities. At the same time this year, equities made up little more than half of the group's assets, with the balance split fairly equally between fixed income and multi-asset investments. This variation contributed to Jupiter generating investment gains of £0.7bn during the first half, and investment returns rocketing to £2.5bn during the third quarter.

Jupiter is also diversifying its client base. Admittedly, 79 per cent of its clients are UK-based, but this is down from 89 per cent five years ago. During the first half the strongest contribution to assets under management came via its fixed income and European products, while the majority of net flows came from its growing network of overseas offices. Once the fund manager expands into Spain and Italy it will have operations in 19 countries, and it is broadening its product mix in regions where it already has a strong foothold.

However, Jupiter still has significant exposure towards the UK retail market with 87 per cent of assets in mutual funds. This makes it more susceptible to management fee pressure, compared with rivals with large institutional mandates, if the platform market consolidates and starts to exert more pricing power. The fund manager is also less exposed to performance fees, which means it is less able to reap the gains of strong periods of active performance. Nevertheless, Jupiter's cash profit margin remains high at 50 per cent.

The business is also highly cash generative, with more than £200m in net cash on its books. This backs up a generous dividend policy based on paying out a base dividend of half earnings and returning a further 40-or-so per cent by other means. This has meant special dividends in 2014 and 2015 of 11.5p and 10.9p (included in the figures in our table) and another special dividend is planned this year.