Fitch Affirms Jupiter Fund Management at 'BBB'; Outlook Negative

Fitch Ratings has affirmed UK-domiciled and listed investment manager (IM) Jupiter Fund Management PLC's (Jupiter) Long-Term Issuer Default Rating (IDR) at 'BBB' and subordinated debt at 'BBB-'.

The Outlook on the Long-Term IDR is Negative.

The Negative Outlook reflects Fitch's view that Jupiter's business profile remains sensitive to net fund outflows and market valuation adjustments, which the agency expects to remain under pressure in the current challenging market climate, in turn weakening its financial metrics.

Key Rating Drivers

Small Versus Peers: Jupiter's IDR reflects its well-established UK retail presence but more concentrated and smaller scale franchise than rated IM peers, which can increase the vulnerability of assets under management (AuM) in volatile markets. Jupiter's low leverage supports its rating.

Jupiter's AuM of GBP51.4 billion at end-1H23 (end-2022: GBP50.2 billion) is small compared with rated IM peers'. The predominantly retail-focused client base has led to pressure on net flows in a climate of risk aversion, with net outflows averaging -8% over 2019 to 2022. In 2022 AuM saw a steep decline from GBP60.5 billion at end-2021, primarily as a result of market valuation effects but also due to significant net outflows, before stabilising during 1H23.

Increasing Institutional Share: One of management's key strategic aims is to increase geographical diversification and to grow the proportion of institutional clients. Jupiter has seen some success in this respect with international AuM now comprising 36% and institutional business increasing to 18% at 1H23 from 8% at end-2021. Fitch expects that this will lead to less pressure on net outflows in the medium term but it could also lead to a more volatile flow pattern due to the larger size of individual institutional mandates.

Greater but Still Limited Diversification: The 2020 acquisition of Merian Global Investors Ltd (Merian) led to greater diversification of Jupiter's strategies, in particular, alternatives. However, at end-1H23 Jupiter's AuM exposure to UK clients and to equities remained fairly concentrated at 64% and 60%, respectively. Management are seeking to pursue growth in strategic markets where they believe they can extract scale benefits.

Sound Risk Controls: Fitch views Jupiter's risk controls as robust, with sophisticated risk management systems in place. Nevertheless, its fund managers adopt a high conviction approach, which can lead to both fund performance and seed investment performance volatility, increasing Jupiter's risk profile relative to peers'.

In 1H23 52% of its mutual fund AuM delivered above-median performance over three years against their peer group, down from 58% in 2021. Individual seed investment exposure can be large but total exposure is managed within a limit of GBP200 million and is partially hedged, which mitigates the market risk impact on the income statement.

Decreasing Profitability: Profitability has been on a declining trend with the fee-related EBITDA margin falling to 22% for 2022 from 30% for 2021, largely a result of declining average AuM.

Jupiter has a significant proportion of variable costs, which can protect margins and management have been undertaking a restructuring exercise to cut the cost base to bolster profitability. We expect these measures should start to make a positive impact on profitability, but it will also depend on AuM growth driving management fees.

Modest Debt: Jupiter's only drawn debt is GBP50 million of subordinated notes, issued in April 2020 to increase its headroom against regulatory capital requirements for the acquisition of Merian. At end-2022, Jupiter's cash flow leverage was low at 0.5x (measured as gross debt/fee-related EBITDA). Jupiter holds a GBP40 million revolving credit facility for back-up liquidity but this remained undrawn throughout 2022.

Healthy Capital Surplus: Management conducts regulatory capital assessments as well as capital and liquidity stress testing via the annual ICARA process under the new UK investment firm prudential regime. Regulatory capital surplus under IFPR has increased significantly and the regulatory requirement is now more than 3x covered by available capital resources.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Renewed net outflows, particularly in relation to new strategies, or erosion of margins beyond that naturally accompanying a greater proportion of institutional business, weakening our assessment of its business profile

Inability to execute new strategic objectives aimed at diversifying the business model and growing the institutional investor base

Deviation from Jupiter's current strategy of avoiding leverage within the business (bar the Tier 2 notes)

A major operational loss challenging the robustness of Jupiter's risk-control framework

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The Outlook could be revised back to Stable if we see a sustained trend of net inflows leading to a stabilisation of Jupiter's AuM alongside fee-related EBITDA margin of 20% or higher

An upgrade is unlikely in the medium term unless Jupiter sees a material increase in overall scale and geographic or asset-class diversification, leading Fitch to revise upwards its assessment of its company profile

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

Jupiter's GBP50 million fixed-rate 10-year subordinated notes qualify as Tier 2 regulatory capital. They are rated one notch below Jupiter's Long-Term IDR, to reflect their greater loss severity due to their subordinated nature. The notes have a call option and interest reset in 2025.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The subordinated notes' rating is primarily sensitive to a change in Jupiter's Long-Term IDR, from which it is notched.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.