Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan Claverhouse. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
JPMorgan Claverhouse (JCH) invests in predominantly large cap UK companies, with a focus on those that provide consistent and growing dividends.
The managers, William Meadon and Callum Abbot, often refer to the trust as a "get rich slow" fund, aiming to consistently outperform its benchmark index, the FTSE All-share. The duo utilise a bottom up stock picking approach, and place an emphasis on understanding the value, quality and momentum characteristics of a company before making an investment decision. The portfolio holds between 60-80 stocks, reflecting a change in strategy made in 2012, with the managers having been encouraged to adopt a more ‘high conviction’ approach. As such, the managers are not afraid to run their winners, and subject to risk controls, have conviction positions in the portfolio. This is illustrated through the top ten holdings making up over 45% of the portfolio.
The trust has a strong track record of outperformance, and since the change of strategy seven years ago JCH has generated NAV returns of 101.2%. This is considerably more than the FTSE All Share (69.8%) and the AIC (90.8%) and IA peer groups (73.8%). In more recent times, the performance has been subject to the volatility of the market, especially in Q4 2018. Since then however, the trust has rallied and has returned close to 14% year to date.
Perhaps even more impressive than its total returns, is the trust’s dividend history. Currently yielding 3.9%, the trust’s 2018 dividend represented the 46th successive year of growth and was a 5.8% increase over the previous year. Furthermore, the trust has exceptionally strong revenue reserves, and the most recent dividend was covered close to 1.3x by revenue reserves.
Over the past year the trust has traded on an average discount of 0.9%, considerably narrower than the AIC sector one-year average discount of 5.4%. With this said, and in common with many other UK-focused trusts, the discount has widened somewhat over the past couple months and currently sits at 4.5%.
There are numerous reasons to like JPMorgan Claverhouse in the current market environment. The leading reason is due to the strong and, most importantly, reliable income that the trust offers, with the dividend currently yielding 3.9%. As can be seen below, no trust in the AIC UK Equity Income sector can compare in terms of revenue reserves, and in uncertain market conditions this will calm the nerves of many income reliant investors.
Revenue reserves vs. Peers
Along with reliable income, the trust has a strong track record for outperformance of the benchmark and peers. The change in strategy in 2012 was a turning point for the trust and managers, William Meadon and Callum Abbot, sit in the top half of the AIC UK Equity Income sector for alpha generation (0.44%, Morningstar).
Currently the trust is trading on a discount of around 4.8%. However, we consider any discount to NAV as a good potential entry point for investors who are looking for income and capital appreciation.
|Strong total returns over the long term
||The trust’s charges sit towards the upper end of the sector
|Extremely reliable dividend, back up by deep reserves
||Has one of the highest standard deviations and betas in the sector
|Trading at a discount to NAV
JPMorgan Claverhouse aims to offer investors both capital and income growth from a portfolio built up of UK investments. The trust has a clear tilt towards the large-cap end of the spectrum, with 72% of the portfolio invested in large or giant cap stocks (Morningstar).
The managers, William Meadon and Callum Abbot, utilise a bottom up stock picking approach, rarely taking macro views into account. The team look to identify companies that offer consistent and growing dividends, but the overall shape of the portfolio has no particular stylistic tilt.
When looking at a company the managers don’t consider just one reason for investment, but instead place equal importance on element - value, quality and momentum. This involves understanding not only the profitability, sustainability of earnings and capital allocation of a company, but also understanding the future prospects and the momentum of the business. The managers have multiple examples of the type of company that satisfy this criteria, such as Diageo. Diageo offers diversified growth across numerous alcoholic products, brands and regions of exposure. The company has continued to improve productivity, which has helped margin expansion and further investment in brands and innovation. This has resulted in strong free cash generation over the past few years.
Another example is Fever-Tree. As most will know, Fever-Tree has been an exceptional performer since the public offering in 2014, and over the past three years has a price return of close to 260%. The team at JCH have long recognised the attractive features of the stock, and continue to believe the company fits the value, quality and momentum criteria. They believe that the company’s marketing expertise is particularly attractive and this, mixed with a quality product, has driven the majority of its growth. Although currently trading on a P/E of 35x, the company is still in the early stages of its life cycle, and has the potential to grow exponentially across the globe.
Risk controls are a key part of the portfolio construction, limiting exposure to stocks and industrial sectors relative to the benchmark (+/-3% by stock and +/-5% by sector). Total exposure to small cap companies will normally range between +/-5% of the FTSE Small Cap Index weighting within the FTSE All-Share Index. At the time of writing, the portfolio has a heavy bias towards large and giant cap stocks, with 70% of the portfolio in companies greater than £10bn.
Market cap allocation (£)
Source: JPMorgan Claverhouse
The portfolio comprises of between 60-80 holdings, following a change in strategy in 2012, when the managers were encouraged to adopt a more ‘high conviction’ approach. In practice, this means that the managers are not afraid to run their winners or take conviction positions within the portfolio. This is illustrated below, where the top ten holdings make up over 45% of the portfolios NAV.
TOP TEN HOLDINGS
|Royal Dutch Shell
|JPMorgan Smaller Companies Investment Trust
|British American Tobacco
Source: JPMorgan Claverhouse factsheet
It is interesting to note that, despite having a bias towards larger companies, the trust has a 3.6% holding in JPMorgan Smaller Companies Investment Trust (JMI). Managed by Georgina Brittain and Katen Patel, JMI aims to invest in fast growing, innovative smaller companies that help drive the UK domestic economy. The managers believe that smaller company exposure is best achieved through a market weighting in the diversified JPM Smaller Companies Investment Trust, which has an excellent track record.
The trust’s largest sector allocations are to financials (25.7%), consumer goods (18.3%) and oil & gas (15%). The trust has very little exposure in absolute terms to utilities (0.4%), telecommunications (1.9%) and technology (2.4%).
Looking forward, the managers recognise that there are plenty of uncertainties surrounding the UK markets. Along with this, they see plenty of potential macroeconomic concerns, principally the trade wars between the US and China. Further, the jury is still out on whether Europe can regain a little vigour and on how the Brexit negotiations will turn out. With this said, the managers say there continue to be compelling valuations for UK investors and only during the First and Second World Wars have UK equities been cheaper relative to gilts. The team continue to forecast earnings growth this year and believe a recession is not imminent.
During normal market conditions it is anticipated that the trust will operate within 5% net cash to 20% geared. The managers operate flexibly within these limits and there have been occasions over the past ten years when they have been passed.
The trust currently has a £30m, 7% 2020 debenture, as well as a more flexible £50m facility that charges interest at 1.52% pa. Anticipating the repayment of the 2020 debenture, the team have already locked in £30m of new debt starting in March 2020 which will cost interest just 3.22% pa.
As the graph above shows, gearing consistently sits above 10%, however the managers have varied this based on their outlook. For example, one can see that gearing was dramatically reduced throughout 2018 and the trust’s lowest gearing levels were around the correction in Q4. Since then gearing has once more increased, however it still sits well below the 11.2% gearing seen at the start of 2018.
William Meadon continues to describe the trust as a "get rich slow" fund, aiming to consistently outperform its benchmark index, the FTSE All-share. The trust has gone above and beyond this aim and since the new strategy was implemented in 2012 - the same time that William took to the helm - the trust has generated strong returns relative to the benchmark and peers. Over the seven year period the trust has generated NAV returns of 101.2%, considerably more than the FTSE All Share (69.8%) and the AIC (90.8%) and IA peer groups (73.8%).
PERFORMANCE SINCE THE CHANGE OF STRATEGY
On an annual basis, returns have been consistent and, as can be seen below, the trust has outperformed the benchmark in five of the past seven years (including 2019). Similarly, the trust has outperformed the AIC peer group in five of these years and much of this is due to the balanced approach the manager undertakes. Comprising of both value and growth stocks, Claverhouse, has performed significantly better than more value-orientated peers, like Perpetual Income and Growth and Edinburgh Investment Trust, outperforming in three of the past four years.
More recently, returns have seen greater variation largely due to macroeconomic events. Over a one-year period the trust has lost 4.9%, only marginally less than the benchmark (-2.7%) and the AIC (-3.4%) and IA peers (-4.7%). Much of this was due to the correction at the end of 2018, which hit the trust particularly hard. The stocks that fared worst during this torrid period were the cyclicals, including the likes of JD Sports and Thomas Cook.
With this said, a one-year view is very short term and the trust has since rallied. In particular, many of the worst performers in Q4 have rebounded and the trust has once more comfortably outperformed the benchmark (9.8%) the AIC peer group (9.5%) and the IA peer group (9.1%) in 2019, delivering NAV returns of 14.1%. Particularly noteworthy is JD Sports Fashion, which after being hammered in Q4, has now generated a stock return of 61.6% over the year (to the end 1 April). In April, JD reported better than anticipated results as the company capitalises on its strong online offering and key brand partnerships with Nike and Adidas. John Laing and Rio Tinto also have been standout performers.
ONE YEAR PERFORMANCE
JPMorgan Claverhouse has an exceptional track record for dividend growth and 2018 was the 46th successive year in which the dividend has been raised. The increase of 1.5p, to 27.5p, represented a 5.8% increase over the previous year, following a 13% increase in respect of 2017. As such, the trust currently yields 3.9%, this is inline with the sector weighted average which also sits at 3.9%.
However, what makes Claverhouse stand out relative to peers is its exceptionally deep revenue reserves. The manager and board alike recognise that the trust is an income vehicle for many investors and as such there is a clear emphasis on maintaining high levels of revenue reserve. Following the payment of the final dividend in March the revenue reserves amounted to 32.4 pence, once more growing from 31.4p from in 2017. This means the dividend is once more comfortably covered by revenue reserves (around 1.3x) and illustrates the capacity for the trust to be able to increase its dividends through thick and thin over the coming years.
Source: JPMorgan Claverhouse Annual report
At the helm of JPM Claverhouse are co-managers William Meadon and Callum Abbot. William has been managing Claverhouse since the 1st of March 2012 and is head of the core team in the JPMorgan Asset Management International Behavioural Finance Team. William was instrumental in introducing the new management strategy, which honed the trust’s portfolio, reducing the number of holdings to reflect a more ‘high conviction’ approach.
Previously William was supported by Sarah Emily, who was co-manager of the portfolio since 2006 until her death in December of 2017.
Callum Abbot was subsequently appointed as co-investment manager on the portfolio. Callum joined JPMorgan’s European Equity Behavioural Finance team in 2012 and has been working with William on the management of the portfolio since then.
Since 2017, we have seen the trust’s discount narrow relentlessly. Towards the end of 2016 the discount reached lows of around 13%, before reaching a premium of close to 5% only two years later. This re-rating reflects the demand across the market for a trust that can offer a decent yield and capital appreciation. It has been one of the few trusts to reach a premium in the sector over the past year.
Over the past year, Claverhouse has traded on an average discount of 0.9%, considerably narrower than the AIC sector one-year average discount of 5.4%. With this said, the discount has widened somewhat over the past two months and currently sits at 4.8%.
At the beginning of 2018, the board announced that it would implement a more active discount and premium policy. In normal market conditions, we understand that the company will repurchase shares when the discount widens past 5%, to be held in treasury. In response to market demand the company will be willing to sell shares from treasury at a discount to NAV (cum income debt at par), subject to a maximum discount of 2%. Additionally, new shares will be available for issue at a premium to NAV (cum income debt at par), after the costs of issue. Over the past year (to the end of May) 1,691,402 shares have been issued from the treasury and 105,000 new shares were issued.
The trust has an annual management charge of 0.6% per annum for the first £500m of net chargeable assets, and a reduced fee of 0.5% thereafter. This contributes to an ongoing charge of 0.76%. This means that the trust sits towards the upper end of the sector, where the weighted average is 0.61%. With this said, the trust sits towards the smaller end of the sector and doesn’t benefit from as many economies of scale as other trusts. Additionally, the fact the trust has generated stronger returns than most peers, without charging a performance fee, means we consider the fee justified.
The KID RIY for the trust is 1.69, relative to the weighted average of 1.16. With this said, calculation methodologies among companies can vary.
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Fund History: JPMorgan Claverhouse
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