Jupiter Merlin funds: a fund for every risk profile

Staci West 20/06/2023 in Equities, Multi-Asset

Jupiter offers a number of funds within their Merlin range, which are managed by a highly experienced team of professionals. These funds have different investment objectives and mainly consist of funds of funds. Although there may be some overlapping holdings, each fund is customised to match its specific investment goals and risk tolerance. FundCalibre currently rates three of the funds within the range: Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Growth.

David Lewis co-manager on the range of funds joins us today to explain the difference between the Income, Balanced and Growth funds — primarily focusing on their different risk profiles and the funds’ exposure to equities as a result. We discuss the advantages of the multi-manager approach in comparison to direct assets and why the managers believe the “fund of funds” style is best.

The second half of the video focuses on the current economic environment considering high inflation around the world and high interest levels in the Western world. David explains why he believes markets will continue to have a degree of volatility for the next 6-12 months and the two themes the team believes have emerged stronger from this period: deglobalisation and decarbonisation. We finish with how these market conditions have influenced the portfolio recently and how they might shape the portfolio in the next 6-12 months.

I’m Staci from FundCalibre, and today I’m joined by David Lewis, co-manager on the Jupiter Merlin range of funds. David, thanks for joining us today.

[00:09] Thanks very much for inviting me.

Now, as I mentioned you, along with a team of managers, manage the Jupiter Merlin range, and there’s three funds from that range that are Rated from FundCalibre. There’s the [Jupiter Merlin] Balanced, [Jupiter Merlin] Growth and [Jupiter Merlin] Income funds. So briefly, just to start us off, can you explain the difference between these three funds for investors?

[00:30] Yeah, certainly. So, the Jupiter Merlin Income, Balanced and Growth Portfolios are part of our broader suite of products that we run for end investors. And we essentially have solutions at various points across the risk return curve. So, starting from the lowest risk, we have the Merlin Income Portfolio; so that sits in, what’s known as the Investment Association or IA [Mixed Investment] 20 – 60% shares category. Then above that, you have the Merlin Balanced Portfolio, which sits in the [IA Mixed Investment] 40 – 85% shares category. Then above that, you’ve got Growth within the IA Flexible sector. And essentially, they sit on this continuum, and they’re really made to be appropriate for different clients at a different point on the risk return curve. 

So, the Merlin Income Portfolio, for example, it tends to have some routine about 50-60% in equities most of the time. We use equities as the key barometer for risk here because they tend to be the riskiest asset class that we choose to invest in. So, for Income as an example, you may have 50% in equities and 50% in other diversifying things, other things that have a different performance rhythm to what we’re investing into, in order to try to reduce the risk of that portfolio. And, in our case, those other assets tend to be fixed income. So, lower risk, fixed income assets with a bit of property, a bit of gold and some cash. 

Then above that, you’ve got the Balanced Portfolio, which has typically between about 75% and 85% in equities with the remainder of being in those diversifying asset classes. 

And then above that you’ve got the Merlin Growth Portfolio, which tends to have between about 85% – 100% in equities, with any remainder being in those diversifying asset classes.

[02:36] And then what are the advantages of investing in lots of different funds – so, the multi-manager approach over investing directly in those different assets?

[02:47] Yes. So, we believe that people make the difference in active management, and we believe that active managers can, and do, outperform over the medium to long-term. But rather than just trusting us to invest all the capital for clients in equities, bonds, and other areas, we decide to give that out to people we believe have specialist knowledge and are experts in their individual fields. 

So, we’ll be allocating capital to individual UK equity managers or US managers or areas of the managers in the fixed income world who we believe have specific experience and talents in order to generate excess returns versus their benchmarks over time. And we think that’s a very efficient way of doing things because we do believe that each of those areas requires specialist skills, which we’re able to access by buying into those specialist managers.

The other added benefit of us being able to allocate in this multi-manager approach is that we can blend different styles of manager to ensure that we hopefully are able to outperform over time, but do it in hopefully a smoother return profile than you might get otherwise investing in one manager that has one particular style, which can be more volatile over time. 

We can then, of course, tilt our exposures where we see the most attractive opportunities over time, and also by investing directly in funds and the ones that we are investing in anyway, tend to be quite liquid so, we’re able to move our asset allocation, move our manager selections over time, swiftly to accommodate different changing economic or market environments.

And speaking of economic environments, there’s a lot happening in the world today. There’s inflation headlines, there’s interest rates. So, what are your views on the macroeconomics today?

[04:53] Well, it’s a complicated picture. And I think part of the reason for that is we’re coming out of this environment of really two huge global exogenous shocks, both of which have had really profound impacts on some global supply chains. And that’s part of the reason – as well as the major policy response enacted – that we’ve seen such high inflation reverberating around the world. And that’s really making a very challenging economic backdrop and a difficult one to predict because it’s different to cycles in the past. 

The other factor we’re laying on top of that is the fact that you’ve got that policy response that’s taking place in order to try to reduce that inflation, and the high interest levels that we can see, particularly around the western world, are really beginning to bite.

So, where we are now, it certainly feels like inflation should start coming down over time, although it has been a lot stickier than central bankers particularly had expected to start with. And it’s also, it seems likely that we’re going to have a slowing in broad economic growth as that impact of those interest rate hikes really come to fruition because we’ve got to bear in mind in that interest rate hikes, it tends to take sometimes between 9 and 18 months to really have a material impact on the broader economy. So, those last hikes we’ve seen, are really yet to feed through into the economy. 

So, certainly, we certainly think it likely that we’ll have a fair degree of volatility over the next few months and quarters, potentially for the next year or so, but we do think that the interest rate hikes that have been put through, hopefully over time, will bring us onto a more stable footing. 

Having said that, we do believe that there’s a reasonable scope for higher inflation being more enduring in the years ahead. And the two I suppose, really major components to that are the major theme of de-globalisation – so supply chains being brought closer to their end markets and at [to] a degree, I suppose, of friend shoring, so maybe moving away from China being the sole supplier or products, to maybe China plus another country or other countries more broadly. That has a potential to bring inefficiencies into the world which potentially drive up inflation. 

And the second major theme is decarbonisation. So, we all obviously want to have a healthy planet for the generations ahead, but the process of moving towards producing energy particularly from sustainable sources is going to be extremely expensive. 

That’s part of the reason that oil and gas and hydrocarbons have been so successful over so many years is because they’re very, very energy dense and moving to solar or wind is just less efficient than is burning those hydrocarbons. And therefore, or that brings in inefficiencies as does the requirement to totally transform our energy infrastructure onto those renewables; it is going to be incredibly expensive to do and again, may well drive inflation in the years to come. 

So yes, we think there’s going to be volatility in the next say year or so, but then potentially inflation sitting maybe higher than we’ve got used to over the last decade or so due to those big secular factors.

And then just to finish, I mean, you’ve outlined a very challenging environment, but then you’ve touched on two themes of deglobalisation and decarbonisation. So, with kind of those in mind, how are you positioning the portfolios going forward with a challenging environment, but then also these bigger themes? And then maybe have you made any recent changes because of that in the portfolios?

[08:58] So broadly speaking, looking at our portfolios, we tend to be big believers that equities are the best asset class for the medium to long-term investor. We think they have the ability to compound growth over time, and indeed they have a degree of inflation linking to what they do. So, we do think that, in this potentially higher inflation world that we’re going to go through, we think that equities are a very sensible place to have assets, particularly potentially those ones that have been unloved for many years, on the more value side of things, things that which potentially have more in the real assets. We like equities in this environment. 

But we’re balancing that with – in terms of our lower risk component – that those diversifying assets, predominantly fixed income assets – we’re focusing those on lower risk fixed income managers, those that tend to have significant exposure to things like sovereign bonds. Because we do believe if we go through a challenging time over the next 6 to 12 months or so, those more defensive assets can really help shore up the portfolio returns, because we could well see inflation coming down swiftly on the back of lower economic growth, which may well reduce a requirement for interest rates to be so high. And those bonds will do well in that environment because their yields will fall and their prices will rise, potentially in a time when equities might not be doing quite as well. 

So, we’re looking for that diversification across our portfolios, but also being very mindful overall, that we want to be invested in equities because we think they’re a good place to be. In terms of the most recent changes, we haven’t really been changing the sort of top-down complexion of what we’re doing. We’re always trying to assess and find good managers to populate our portfolios with and we have added a couple of new ones within the last couple of months or so, but not materially changing the dynamics at play within the sort of top-down asset allocation within the funds.

That’s great. David, thank you so much for joining us today and sharing your views.

[11:08] Well, thank you very much for having me.

If you’d like to learn more about the Jupiter Merlin range of funds, please visit FundCalibre.com and don’t forget to like and subscribe for weekly videos.

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