If you listen to most asset allocators, bonds are definitely back as yields currently sit near post-global financial crisis highs, which have historically served as a good proxy for future returns.
Morgan Stanley research shows a strong correlation between starting yields for the Bloomberg US Aggregate index, which serves as a useful representative for investment grade bonds, and total returns over a five-year period.
At current yields therefore, there is ample opportunity for fixed income to generate attractive total returns and regain its standing in providing income and diversification within a portfolio.
However, uncertainty remains over the direction of monetary policy with various central banks globally in the process of cutting, hiking or holding interest rates at their current level.
Even in the US, expectations for interest rate cuts from the Federal Reserve have oscillated from 1.5 percentage points of cuts at the beginning of the year to two 0.25 percentage point cuts more recently.
In this environment, a bottom-up bond selection process seems the best way to navigate the current uncertainty.
Against this backdrop, Vincent Au, managing director and chief investment officer at ALPS Advisory, chose the Jupiter Dynamic Bond fund and the Algebris Global Credit Opportunity fund for this week’s head to head.
| Jupiter | Algebris | |
| Size | $6.04bn | $1.82bn |
| Inception | 2012 | 2016 |
| Managers | Ariel Bezalel, Harry Richards | James Friedman |
| Three-year cumulative return | -5.08% | 14.36% |
| Three-year annualised return | -1.6% | 4.68% |
| Three-year annualised alpha | 0.93 | 6.46 |
| Three-year annualised volatility | 7.04 | 5.99 |
| Three-year information ratio | 0.31 | 1.39 |
| FE Crown fund rating | ** | * |
| OCF (retail share class) | 1.47% | 1.03% |
Investment approach
Both the Jupiter fund and the Algebris fund combine top-down and bottom-up analysis, although Au notes that there are subtle differences between the two.
The macroeconomic-driven approach for the Jupiter fund is led by fund managers Ariel Bezalel and Harry Richards. They look at the medium- to long-term economic outlook based on their research.
This is then combined with bottom-up credit analysis performed by their research team, which involves modelling companies’ cash flows, covenant reviews and on-the-ground company visits.
“The flexible mandate allows the fund managers to dynamically adjust the portfolio’s risk profile in response to evolving market conditions. Overall, the Jupiter Dynamic Bond fund leverages a robust, research-driven process to navigate the global fixed income markets,” said Au.
“This distinction in the investment process and the portfolio manager’s expertise lends the Algebris fund a different character compared with the Jupiter Dynamic Bond fund, even though they share some high-level similarities in their flexible, multi-asset fixed income mandates.”
vincent au, alps advisory
Meanwhile, the Algebris fund is led by James Friedman, who is a credit research specialist rather than a macroeconomic specialist, meaning the fund has more of a bottom-up security selection focus than the Jupiter fund.
Given Friedman’s background in financial credit, the fund has a larger allocation to the financial sector as well.
Au notes that top-down inputs are still harnessed, but this takes the form more of portfolio overlays such as hedges and occasional directional bets.
“This distinction in the investment process and the portfolio manager’s expertise lends the Algebris fund a different character compared with the Jupiter Dynamic Bond fund, even though they share some high-level similarities in their flexible, multi-asset fixed income mandates,” said Au.
Regional allocation:
| Jupiter | Algebris | ||
| North America | 62.6% | Europe | 29.7% |
| Asia Pacific ex-Japan | 24% | North America | 24.6% |
| Europe ex-UK | 21.6% | UK | 11.6% |
| UK | 21.6% | Latin America | 10.8% |
| Caribbean & Latin America | 3.8% | Central & Eastern Europe | 3.2% |
| Emerging Europe | 2.2% | Africa | 1.4% |
| Middle East | 1.2% | Asia Pacific | 0.5% |
| Africa | 0.4% | ||
| Other | 2% |
Top five issuers:
| Jupiter | Algebris | ||
| US Treasury 2.375% | 6.9% | Barclays | 3.6% |
| Republic of Korea 2.375% | 6.6% | Mexican government | 3.5% |
| Commonwealth of Australia 1.75% | 4.8% | Federal Republic of Brazil | 2.9% |
| US Treasury 2.875% | 3.6% | Deutsche Bank | 2.9% |
| Commonwealth of Australia 3% | 3% | BNP Paribas | 2.1% |
Performance
Au dichotomises the performance of the two funds into pre-2022 performance and post-2022 performance.
In the pre-2022 period, Au notes that the Algebris fund, under the auspices of former portfolio manager Alberto Gallo, demonstrated higher volatility than the Jupiter fund.
“The Algebris fund exhibited a more pronounced ‘beta-plus’ behaviour, with sharper drawdowns and stronger rallies, in contrast to the more steady, smoother performance of the Jupiter fund. However, both funds outperformed their peer group during this time, achieving their respective objectives,” said Au.
Au noted that post-2022 when Friedman took over the Algebris fund, its outperformance has become more obvious, which he attributed to two factors.
Firstly, the Algebris fund has a higher allocation to financial credit, which outperformed the index during this period. Secondly, the longer duration of the Jupiter fund has been more of a headwind as the higher-for-longer narrative took hold.
“In summary, the subtle differences in the investment processes and portfolio manager’s expertise have led to diverging performance outcomes between the two funds, particularly in the more recent period,” said Au.
“The Algebris fund’s more pronounced bottom-up, credit-focused approach, combined with the portfolio manager change, have contributed to its outperformance relative to the Jupiter fund’s more macro-driven, duration-sensitive strategy.”
| Fund | YTD* | 2023 | 2022 | 2021 | 2020 |
| Jupiter | -0.29% | 9.93% | -14.12% | 1.53% | 7.91% |
| Algebris | 4.15% | 13.13% | -1.43% | -0.1% | 14.59% |
Manager review
The Algebris fund underwent a significant change when Gallo left in 2022 and was replaced by Friedman. The team has been further boosted by the addition of Gabriele Foa, who specialises in emerging markets macro, and Samuel Sibony, a US corporate credit specialist.
“This expanded portfolio management team is supported by two investment analysts and can leverage the broader resources of the Algebris firm, including risk management and ESG capabilities. This represents a stark contrast to the previous sole-manager set-up under Alberto Gallo,” said Au.
The Jupiter team, in contrast, has been steadier. Bezalel joined Jupiter in 1997 and has been a fund manager since 2000, while Richards joined Jupiter in 2011 and became a fund manager in 2018.
“The current market environment, characterised by a high degree of uncertainty and rapidly shifting narratives, could pose a more significant challenge for the macro-driven approach of the Jupiter fund.”
vincent au, alps advisory
Au notes that Jupiter places more emphasis on macroeconomic analysis, whereas Algebris prefers higher-yielding security selection and given the current market environment, he favours the latter.
“The current market environment, characterised by a high degree of uncertainty and rapidly shifting narratives, could pose a more significant challenge for the macro-driven approach of the Jupiter fund,” he said.
“In such an environment, market sentiment and fear can dominate, potentially undermining the effectiveness of the top-down, macroeconomic perspective. This contrasts with the Algebris fund’s more bottom-up, credit-focused approach, which may be better equipped to navigate the prevailing market dynamics.”
Conclusion
Au emphasises that he respects both management teams and philosophies and both are “high-calibre offerings”.
He notes that the changes at Algebris with the expansion of the portfolio management team, have added to its offering, while he also rates the Jupiter fund for its steadier investment process.
However, given the current macroeconomic environment, which poses challenges for forecasting, he leans towards the Algebris fund.
“The Algebris fund’s more bottom-up, credit-focused approach, leveraging the firm’s expertise in financial credit investing, may be better equipped to navigate the prevailing market dynamics,” he said.
“Given the persistent nature of the current market conditions, which we do not foresee changing in the near term, we believe the Algebris Global Credit Opportunity fund is the more favored choice at this juncture. The fund’s investment process and team setup appear better suited to deliver on its objectives within the challenging environment.”
