Fitch Ratings has revised the Outlook on Jupiter Fund Management PLC's (Jupiter) Long-Term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'BBB' and subordinated debt at 'BBB-'.

The Negative Outlook reflects Fitch's view that Jupiter's business profile is increasingly sensitive to net fund outflows and market valuations adjustments, which the agency expects to remain under pressure in the current challenging market climate, which could weaken financial metrics.

Key Rating Drivers

Jupiter's IDR reflects the company's established UK retail franchise but also its smaller scale and more concentrated business profile than investment manager (IM) peers. Fitch assesses Jupiter's risk controls as robust but its high-conviction strategies and the high proportion of assets under management (AUM) dedicated to equities inherently increases its risk profile. Jupiter has witnessed net outflows over recent years, which continued in 1H22 and its retail focus and smaller scale increase its vulnerability to net outflows versus peers. However, Jupiter's relatively low leverage is a rating strength.

Jupiter is a UK-domiciled traditional IM servicing predominantly retail clients via a number of intermediary distribution channels and platforms. AUM were boosted by the 2020 acquisition of Merian Global Investors Ltd (Merian), which added GBP16.6 billion to its AUM base. However, with AUM of GBP49 billion at 1H22, Jupiter remains materially smaller and more concentrated than higher-rated peers. Jupiter's AUM declined by around GBP12 billion in 1H22 through a combination of net outflows and negative market effects.

The Merian acquisition led to greater diversification of Jupiter's strategies, in particular, alternatives. However, Jupiter's AUM exposure to the UK and to equities remains concentrated at 71% and 55%, respectively, at FYE21. Management is seeking to diversify geographically into the US, Chinese and Australian markets. To this extent, Jupiter has a strategic distribution partnership with US investment firm NZS Capital and also inherited a relationship with the Chinese financial services firm Ping An via the Merian acquisition.

Management also has a strategic aim to expand the institutional client base to 20% of AUM over the medium term from the current 10%. Fitch believes that this will be positive for the stability of net flows as Jupiter's retail focus can lead to volatile flows during periods of market uncertainty, although the larger-sized institutional mandates can also result in uneven flows.

Fitch views Jupiter's risk controls as robust, with sophisticated risk management systems in place. Nevertheless, Jupiter's risk profile is heightened by its high-conviction approach and the high proportion of equities in its AUM mix. As a result, fund performance can be volatile, and at 1H22, the percentage of mutual fund AUM delivering above-median performance over three years fell steeply to 43% (FY21: 58%). Direct market risk is limited and mainly results from Jupiter's seed book exposure (GBP142 million at end-2021). Individual seed exposures may be large and can be held for several years but are partially hedged, which mitigates the market risk impact on the income statement. Indirect market risk is more relevant for Jupiter, with market downturns negatively affecting fee-earning AUM. This was evident in 1H22 when Jupiter's AUM declined by 13% as a result of the market effect.

Net flows have been negative over the past four years at 8.9% on a four-year average basis, which partially reflected one-off developments, such as the departure of a key fund manager in 2019. Net outflows continued in 2021 as well as 1H22, highlighting Jupiter's vulnerability to its largely retail client base particularly in periods of risk aversion. Positively, new strategies have seen net inflows over the past four years.

Profitability has been sound but declining in recent years with a four-year average EBITDA margin of around 39%. The decline has been partially due to Merian's lower-margin business as well as general fee pressure seen throughout the industry. Additionally, margin attrition will be likely due to the increasing proportion of institutional mandates in the AUM mix. In 1H22 Jupiter's EBITDA margin contracted to 22% (FY21: 33%) due to the significant decline in management fees from the lower AUM base. Jupiter has a significant proportion of variable costs, which can protect margins and management has announced a restructuring exercise that will cut the cost base significantly in order to bolster profitability. However, sustained healthy profitability level will also depend on AUM growth driving management fees.

Jupiter's only drawn debt is GBP50 million of subordinated notes, issued in April 2020 to increase its headroom against regulatory capital requirements on the acquisition of Merian. At end-2021, the notes were more than 3x covered by cash of GBP194 million and Jupiter's cash flow leverage was low at 0.3x (as measured by gross debt/fee-related EBITDA). Jupiter holds a GBP80 million revolving credit facility for back-up liquidity but this remained undrawn throughout 2021.

Management conduct regulatory capital assessments as well as capital and liquidity stress testing via the annual ICAAP process, which has now moved over to the ICARA process under the new UK Investment Firm Prudential Regime. The IM's regulatory capital surplus under both processes is sound.

SUBORDINATED DEBT

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.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The inability to stem net outflows over the next 12 months, particularly in relation to new strategies, or material erosion of Jupiter's margins that weakens our assessment of 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 and improved financial metrics, notably profitability;

An upgrade is unlikely in the medium term. However, material increase in overall scale and geographic or asset-class diversification, leading Fitch to revise upwards its assessment of Jupiter's company profile could be ratings positive.

SUBORDINATED DEBT

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

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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