Jupiter’s Edward Bonham Carter, is an engaging character whose liberal use of metaphors to describe the rigours of running one of the top three retail fund houses in the UK is both entertaining and alarmingly accurate
He issues rowing oars – metaphorically speaking – to staff and likens the credit crunch to a cross between surviving an earthquake and Custer’s last stand, has no regrets about ‘doing a Wogan’ and has a bond bench to be proud of.
But there is no denying that Jupiter Asset Management’s chief executive, Edward Bonham Carter, is an engaging character whose liberal use of metaphors to describe the rigours of running one of the top three retail fund houses in the UK is both entertaining and alarmingly accurate.
Founded over 20 years ago by John Duffield, Jupiter was bought by Commerzbank in 1995. Following the departure of Duffield, Bonham Carter took over running the business in 2000. In 2007, Commerzbank sold Jupiter to US private equity group TA Associates, which holds a minority stake in the business and Jupiter’s management.
TA Associates has three seats on Jupiter’s board and Bonham Carter says the relationship works well. Jupiter was TA’s 11th investment in the asset management sector.
“A minority investment means they are backing management and staff who have the majority stake. It is not a hostile relationship because there is an alignment of interest,” says Bonham Carter who says there is no pre-determined exit for TA who tends to have a longer-term strategy than competitor private equity firms.
Whatever happens in the future, Bonham Carter is clear management and staff are likely to retain a significant stake. Currently 95% of Jupiter’s 470 staff own more than half of the investment house, making it one of the highest ownership ratios by management and staff of any major UK retail house.
Bonham Carter is a firm believer in the advantages of share ownership as an incentive for employees to move the business forward and to ensure a higher likelihood of success for customers.
“It is fashionable to talk about incentives, but we genuinely eat our own cooking by investing in our own funds. Also the bulk of people’s remuneration is locked up in share ownership so we pay slightly below market salaries compared to others,” explains Bonham Carter, who says that salaries are capped at top level with bonuses for fund managers based on short to medium term performance.
He also believes shares should be used as a medium- to long-term incentive to ensure staff’s interests are aligned with the customer.
“The recent crisis, particularly in banking, saw people consciously taking risks with shareholder money in part because they could simply walk away. If you have a stake in the business you are running you are more likely to think like a business owner. That is quite an important point going forward,” says Bonham Carter.
While his approach to staff ownership may look to some as verging on the co-operative, having studied politics and political philosophy at Manchester, Bonham Carter is in a strong position to argue otherwise.
“Someone did once say the place [Jupiter] had a student feel about it, but I would not say it is a co-operative. The balance you want to get right is that you want key stakeholders to be involved in decision making, particularly when it comes to funds, but on the other hand you can’t just be a talking shop as the business moves relatively quickly,” he explains.
He also believes in linking the size of shareholding to contribution to the business. “The way I visualise the business is that we are all in a rowing boat and the Atlantic represents the challenge of creating investment performance – sometimes the weather is squally and sometimes it is not. Those people who make the biggest contribution in terms of pulling the oar to the greatest effect and therefore making the biggest difference to the business should have the appropriate shareholding to reflect their contribution and I don’t think people have an issue with that internally,” says Bonham Carter.
In terms of his own personal satisfaction Bonham Carter still enjoys the challenge of the keeping Jupiter at the top of its game.
“I like the fact investment management is not a scale business in the sense there is no relationship between the size of the investment firm and the probability the end customer is going to get an extra level of performance.
“There are not many other professions that allow you to measure whether people are doing a good or bad job on a daily basis. It definitely makes it an interesting place to be,” he adds.
He exudes the same enthusiasm when talking about investment vehicles. Bonham Carter is a great fan of unit trusts as diversified investment vehicles for individuals as well as institutional investors, although he is not slavish to the concept and does see potential in introducing new vehicles and products that suit market conditions.
In particular, Bonham Carter believes market conditions are ripe for absolute return funds that beat cash benchmarks by a margin, albeit still an immature sector.
“As risk awareness has developed, the tendency is that investors may not make enough judgements in their portfolio in order to create a return. So I think the absolute return space will develop in the UK, but the pace of the development will be partly determined by markets,” says Bonham Carter, who feels pace will increase with the likelihood of markets moving sideways for a number of years to come, making relative return funds less desirable.
“In broad bull market conditions such as in the 1980s and 1990s then absolute return funds will generally underperform in the relative sense, but if we have sideways, or indeed periods of volatility in down markets, you can create good returns from absolute return funds then there will be a natural demand,” he says.
While investors enjoyed a bull market over a 20-year period since 1982, Bonham Carter points out that for the last 10 years the markets have effectively been flat in nominal terms and possibly even slightly down in real terms, albeit quite volatile times.
He points to 1966-1982 when markets also traded at pretty low levels, similar to current market conditions. In 1982, a coincidence of factors including economic growth, rising earnings and restructuring to market mechanisms saw the onset of a bull market lasting 20 years.
However, Bonham Carter thinks it unlikely that we will see this scenario any time soon. “It is extremely unlikely that we are going to get the bull market conditions of the 1980s and 1990s. A number of particular factors drove those conditions including Paul Volcker coming in as chairman of the Fed in the late 1970s and the more market-driven policies of Reagan and Thatcher,” he says.
If Bonham Carter’s investment prognosis is correct then not only is the time ripe for absolute return vehicles, but investors should factor potential lower performance into expected returns going forward.
“I believe for the next five or possibly 10 years we are going to get broadly ranged trading markets. The reason being is we have to work out current market problems. Debt as a percentage of GDP in the US has more than doubled in 20 years and like all great parties we now have a debt hangover.
“The manifestation of that hangover is going to be lower real growth rates in the western world for a number of years,” says Bonham Carter.
As an alternative, Bonham Carter identifies emerging markets as another growth area for investors.
“Taking into account both the positive and negative implications of investing in emerging markets, we have to accept that in the future that is where the growth is. Is it going to be more volatile? Of course it will be, but these are very exciting areas from an investment perspective.”
While the rise in emerging markets has been heralded before, Bonham Carter feels there is a more mature feeling to growth in the region now. “Part of the skill of a fund manager is to recognise the same patterns as well as the differences. It is clearly different from the early 80s and one of the differences I suspect is the rise of the middle classes in emerging markets, so more of the growth is being achieved internally and a bigger proportion of trade is happening in the region,” he explains.
Ever the pragmatist, he believes investors have the choice of investing directly or alternatively indirectly via companies in Europe. “People often see Europe as boring but forget many leading companies in continental Europe benefit from such trends,” says Bonham Carter.
However, he is wary of signalling a clean bill of health for both the emerging and developed world, despite the recent spate of good news. “We have had the financial equivalent of an earthquake and there are likely to be a few aftershocks,” he says. He is particularly damming about the level of mistakes that have been made and the long term affect on the world economy.
“It is like blaming the General of a famous last battle. People always look back and think it is a case of simply saying we are not going to make that mistake again. But the danger, in my view, is that some egregious mistakes have been made on a number of different levels, whether it is people gearing up too much for their mortgage or bankers taking too much conscious or unconscious risks with their balance sheets, plus the political environment encouraging people to be lulled into a false sense of security.
“So, it is not a case of saying we will not make that mistake again and by blaming one part of society means we are missing the point,” he argues.
In terms of his own mistakes, he sees one as not going stronger on a bond investment theme earlier. “We recently launched the strategic bond fund and one of the things investors do not realise is we have good bench strength in terms of fund managers and I need to raise the profile of this talent and make the market aware of what a good squad we have,” says Bonham Carter who identifies John Hamilton as a good example of the talent in Jupiter’s bond team.
“John has run our corporate bond fund since inception. He was underperforming at a time when high yield bonds where rising in price and there was a rush to junk in 2006 and 2007 but he stuck to his knitting and was proved right,” he adds.
Out of all of this you get the impression that while Bonham Carter is a CEO he is still deeply interested in the fund management side.
“I still find it absolutely fascinating and so when company results come up I cannot help myself looking at them, it is a terrible vice. But we are an investment business and we have got the luxury of some very good managers so, like Terry Wogan, it was time to hand over and concentrate on the day job,” he says.
Part of the day job is to identify growth opportunities for the business. Bonham Carter clearly identifies this as overseas markets.
“We have been slow at going into Europe, that is partly because there is a lot of opportunity in the UK and partly because, for all this talk of one market, it is still some years away so there are lots of explicit and implicit costs involved in going into Europe,” says Bonham Carter.
His strategy so far has been a focus on markets such as Germany, Austria and Switzerland.
He also identifies France as an area of interest, where Jupiter currently runs a E300m fund. “There is evidence to suggest the stranglehold French banks have is starting to ease and equities are an interesting place as returns on cash deposits are going to stay lower for longer, which means people are going to have to look elsewhere for returns,”
In the UK alone, Bonham Carter points to the fact there is about £1tn on deposit whereas retail and institutional fund investment accounts for only £350bn.
“If you look at unit trust business penetration in the UK, we are way behind the US but I think we are slowly and surely moving towards an American 401k system,” says Bonham Carter, who sees the real challenge strategically for the business is to come up with savings solutions for a slice of the population who are gong to want more cleverly thought out products.
His likes the idea of modernised versions of Peps such as the individual personal or capital pension accounts (IPAs) currently under government consultation.
In particular, he believes that individuals should have a more heightened awareness of their financial responsibilities.
“I think at society level we know we are living beyond our means and too many people are retiring too early whether that’s in the public or private sector and as a society we can’t afford it,” says Bonham Carter, who sees giving financial incentives to people to delay their retirement as one solution.
A further problem with investors having to take on more responsibility for their pension is how to deal with issues such as asset allocation. Bonham Carter identifies increasing education on the part of the investment industry as one solution, not least to counteract the negative aspects of equity investment after 10 years of sideways market. He also firmly believes that IFAs also have a role to play, with 90% of Jupiter’s business coming through IFAs.
However, he is concerned the level of current regulation falling on the IFA sector may be decreasing choice for the consumer.
“Of course it is good that we all as an industry have to improve our standards and I think the key thing in terms of fees is that customers need to be made aware of the various means of remunerating both the adviser and fund manager in order to make an informed choice.
“However, the paradox of current regulations alongside concerns about capital in the banking sector means that the choice for consumers may actually be reducing and I don’t think that that is healthy. It’s a better market where people have real choice and multiplicity of choice. So I think if there is a substantial reduction in individual advisers than that’s probably a loss to the customer,” he concludes.
