Take heed of Jupiter short sellers

The group had reported four consecutive quarters of net outflows – amounting to £4.6bn – by the end of December, with the final three months representing the biggest outflow so far at £1.5bn. Almost all last year’s outflows came via mutual funds, with its fixed income strategy responsible for the lion’s share of lost business. During the first half of the year alone, the Dynamic Bond Fund – which accounted for 15 per cent of assets under management – suffered £2.3bn in net outflows, as investors became increasingly unnerved by global central banks signalling the end of the quantitative easing programmes that have buoyed bond prices since the 2008 financial crisis.

Given management fees are based on the average level of funds under management, it is unsurprising that revenue declines are forecast. Shore Capital expects revenue to drop 11 per cent between 2017 and 2019, for example. And there is as yet no sign of a slowdown in the persistent forecast downgrades of the last 12 months, which have reduced 2019 consensus revenue predictions by 23 per cent and earnings by 36 percent. The larger decline in earnings than sales in part reflects an inflexible cost base, which until recently had worked in the group's favour (between 2010 and 2017 underlying operating margins rose from 28 per cent to 42 per cent as a £189m increase in revenue was associate with a rise in operating cost of only £100m).

However, net management fees are also under pressure (see below) as a result of a change in the fund mix towards lower-margin fixed income along with competition from low-cost passive funds and growing regulatory pressure. In the longer term, management hopes this decline can be slowed to one to two basis points (bps( a year, compared with an 82.7bps (or 0.827 per cent) first-half margin and 87.6bps two years earlier.

Falling earnings impact the shares' potential to pay a fat dividend, too, given payments are based on a policy of distributing 50 per cent of underlying earnings per share. And the special payouts Jupiter is known for are likely to come under pressure, too, for a different reason. Jupiter has typically returned surplus capital not needed via special dividends. In 2017, the asset manager made a special payment of 15.5p a share. Analysts at Shore Capital expect this to decline to 7p and 4p for 2018 and 2019, respectively, citing the introduction of new lease accounting rules from 2019. The brokerage reckons that stands to wipe around £50m of Jupiter’s £87m June 2018 capital surplus.