A majority of fund managers typically fail to beat the FTSE indices, which is why I’d rarely recommend handing over cash for them to manage. But the first responsibility of a company is to its shareholders, and buying shares in fund managers instead can be a winner.
Jupiter Fund Management (LSE: JUP) impresses me, after a record of growing its earnings and paying out big dividends. Over five years, superior performance has led the Jupiter share price to a 45% gain, while the FTSE 100 managed only 15%.
On top of that, dividends have been rising nicely, with the year ended December 2017 resulting in a total dividend (ordinary plus special) of 27.2p per share. On a share price around the 520p level, that’s a tasty yield of 5.2%, and it reflects the company’s progressive policy of aiming to pay out 50% of underlying EPS as dividends.
It’s earnings growth that’s made it all possible. Though underlying EPS in 2017 remained pretty much flat at 29.4p per share, it’s been growing slowly but steadily, and analysts have 9% boosts pencilled in for 2018 and 2019.
I see key metrics as supporting long-term EPS growth too. In 2017, 66% of mutual fund assets under management delivered “investment performance above median over three years,” net inflows amounted to £1bn, and total assets under management grew by 13% to £40.5bn.
That enabled the company to hike its net management fees by 10% to £330.2m, and saw pre-tax profit up 4% to £171.4m.
What makes Jupiter Fund Management shares look especially attractive to me is their forward P/E multiples. At 14 and 13 for 2018 and 2019 respectively, we’re looking at valuations a bit below the FTSE 100 average, for shares with predicted dividend yields of 6% and better. I see a long-term buy here.
Man Group (LSE: EMG) is another I’ve liked for some time, and it too has beaten the FTSE hands down. Over five years, it’s beaten Jupiter Fund Management too, gaining 82%, though it has been a more erratic ride — the price was in a bit of a slump, but a 65% climb since August has seen it come right back.
The company went through a bit of a rough patch, but it looks to be firmly back on track now. The key thing for me is cash generation, which has supported a progressive dividend. The interim payment was raised 11% to 5 cents per share, and at the time the company reiterated its policy “to pay at least 100% of adjusted net management fee EPS … by way of ordinary dividend.“
On top of that, Man expects to generate surplus capital over time, which it intends to return via special dividends or by share repurchases. The firm has been doing the latter steadily, and in October announced a plan to repurchase up to $100m in shares.
What’s the price we have to pay to get this superior performance and a share of that cash stream? In my view, a very modest one. A share price of around the 182p mark indicates a P/E of 14 on 2017 expectations, which is a very similar valuation to Jupiter’s, though with slightly lower forecast dividend yields of 4% to 5%.
But superior earnings growth predictions would drop that to under 11 by 2019, and that makes Man Group shares look a tempting bargain to me. Full-year results are due on 28 February.