From back office to front-row seat

Last week\'s surprise news was the move of Jupiter European Special Situations\' Leon Howard-Spink to Schroders. But Jupiter had a home-grown replacement waiting in Cedric de Fonclare.

It’s 9am on his first day running the Jupiter European Special Situations fund, but Cedric de Fonclare is confident enough to talk through the changes he is going to make to it now that Leon Howard-Spink has jumped ship to Schroders.

The standard practice in these situations is for the company to issue a “steady as she goes” press release, insisting that nothing’s really changed, it’s all teamwork you know, and that the loss of the manager is nothing to worry about.

Fortunately Jupiter is a little more grown-up about these things. It knows Howard-Spink is a damn good manager and that his departure is a real loss. Under him, European Special Sits had shot into the top decile over one and three years, giving investors a gain of 31% and 46% respectively.

But Jupiter has had the confidence to elevate de Fonclare into Howard-Spink’s position and give him the leeway to make changes immediately.

“Cedric de Fonclare” conjures up the image of a warrior knight wandering the fields of Agincourt or Cr袹, but in reality he wandered into Jupiter back in 1999 as an administrator rather than as a fund manager or analyst. However, the company spotted his potential quickly, and in 2000 he joined the European team as an assistant to Richard Pease.

In May 2001 he was given responsibility for running the European portfolio within Jupiter’s Global Managed fund and started to build his own track record. Then in 2002 he was put in charge of the Pan European Growth fund, which includes Europe plus the UK.

Its record is impressive – first-quartile over three years, and up 23.2% – well ahead of the benchmark – over the year to May 2005. John Chatfeild Roberts, head of Jupiter’s fund of funds team, likes it too, which is why some of the largest advisers already know a little about de Fonclare.

Howard-Spink will be running the European Alpha Plus fund at Schroders, but won’t be doing so until November, so there is little chance of money pouring out of Jupiter and running over to Schroders in the short term.

Mark Dampier, head of research at Hargreaves Lansdown, says: “It’s brilliant for Schroders to be getting someone of Howard-Spink’s calibre to switch over, although it’s an odd move. Normally you’d see the flow in the other direction. I know that John Chatfeild Roberts rates de Fonclare very highly, and I suspect that while we will put a temporary ‘hold’ on our recommendation on the fund, it won’t last long. Jupiter has a strikingly good record at developing good fund managers out of its back office.”

So what is de Fonclare going to do? Like Howard-Spink he is a stockpicker first and foremost, and will be reshuffling the big holdings in the 225m fund quite substantially.

For example, Anglo Irish Bank is the fund’s single largest holding, just shy of 4% of the portfolio. De Fonclare likes the management, thinks the company has a workable strategy, but feels that it has been overbought. He’s not about to dump the entire holding in Anglo Irish, but it will almost certainly tumble down the list of top 10 stocks. “I’m less of a fan of Anglo Irish than others. The re-rating story has already happened and there is now less added value going forward. It won’t be the largest stock in my portfolio,” says de Fonclare.

He is also interested in changing some of the extreme sector positions taken by Howard-Spink, who had zero in utilities and a very low weighting in financials and energy.

“In truth I’m not that far from Howard-Spink in terms of investment style. Our core investment philosophy is probably very similar, and I respect the stock choices of my colleagues. But if you look at the correlation between my pan-European fund and European Special Sits, they only have 25% of stocks in common.”

Clearly we could see a fundamental shift in the portfolio over the coming months, although de Fonclare doesn’t want to alert the market too far in advance. “I’m keen to bring in my long-term stocks in my other fund,” he says. “Maybe I’ll identify two or three [from the current top 10] that I’ll want to sell, but there’s nothing I need to do straight away.”

He thinks the fund is already relatively diversified, and he is happy with the stock count, currently around 55 – this may move upwards, although not above 70.

“I like to play on the edge,” he says, although he doesn’t like having a long tail of small holdings. He won’t hold anything unless it is at least 0.8-1% of the fund. “If you have less than that you can see the price double, but it makes very little difference to your performance,” he adds.

More recently he has been travelling around Germany visiting companies, and his findings are illuminating. A lot of German companies are telling a positive story on earnings, but the problem is that this is already being reflected in rising share prices.

Howard-Spink’s portfolio was notable in that there were almost no German names in it. The current geographic distribution shows France at 19%, Italy at 14.3% and Ireland at 12.2%. Germany is even less significant than Finland at 3.1%.

Yet German stocks make up three out of the top 10 holdings in de Fonclare’s pan-European fund, and some of those names are now likely to appear in European Special Sits.

He says he can find a lot of good companies in France and Italy where family management has ensured steady earnings growth and sensible acquisitions. He admits to having few Swiss companies in the past, although they currently make up 10% of the Special Sits fund.

De Fonclare is fortunate in being surrounded by one of the better-known and more successful European teams in the business. Alex Darwall will remain head of the Jupiter European team, and will be overseeing de Fonclare’s moves – particularly as he will be sitting right next to him. The team also includes Stephen Pearson, who joined in 2000 and runs the hedge fund, and Elena Shaftan, the high-profile manager of Jupiter’s Eastern Europe fund.

It is not easy to take over the reins when a highly successful manager moves on. De Fonclare faces the biggest challenge of his career so far, but there is no reason to believe he won’t succeed.