Fund Research

JPMorgan American

Last update 14 May 2019

JPMorgan American is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed.

Please see the important information by following this link or at the bottom of the page.

Summary

Investment objective

JPMorgan American is to achieve capital growth from North American investments by outperformance of the S&P 500 index.

As at:

06/05/2019

Group/Investment

JPMorgan American

Ticker

JAM

Management Company

JP Morgan Asset Management 

Manager Name

Garrett Fish;Eytan M. Shapiro;

Association of Investment Companies (AIC) Sector

North America

12 Mo Yield

1.4%

Dividend Distribution Frequency

Semi-Annually

Latest Market Capitalisation

£965,893,884

Latest Net Gearing (Cum Fair)

0%

Latest Ongoing Charge Ex Perf Fee %

0.38

Turnover Ratio %

39.4

Shares Outstanding

 214,881,843

(Discount)/ Premium % (Cum Fair)

-4.9

Daily Closing Price

449.5p


From 31 May, JPM American’s (JAM) large-cap portfolio will reflect the best growth and value ideas from the “Equity Focus” team in New York. As such, JAM’s new portfolio will be significantly more concentrated. To some extent, this change reflects an extension of the portfolio changes which were made in 2017, encouraging the previous manager to increase concentration in the portfolio, but also to run winners longer.

JAM is one of few trusts focused on North America to have outperformed the benchmark over the short, medium and longer term. However, given the board has been consistently buying shares back, it has taken a proactive move to make the trust more interesting and/or relevant to today’s investment trust buyer by modifying the strategy.

The key changes to the portfolio will be that each stock will reflect the best ideas from two co-managers who have worked together for over 20 years, and together run JP Morgan’s Equity Focus Strategy, who each have very different growth and value stock selection styles respectively. The split between growth and value is expected to remain fairly evenly balanced over time, but never more than a 60:40 tilt either way.

Each manager has ultimate decision-making authority over their stocks in the portfolio, but at all times must have between 10 (minimum) and 20 (maximum) holdings at any one time. Position sizes are related entirely down to conviction levels, rather than any other considerations (benchmark constituent etc). Importantly, both managers in the past worked alongside and contributed to the management of JAM as a closed-end vehicle, and so the ins-and-outs of trusts, boards and the subtleties of managing a trust versus an open-ended fund.

In other respects, JAM remains the same in terms of it’s objective, and positioning. The trust aims to achieve capital growth, and is expected to provide a 'core' exposure to North American equities.

Since 2011 (when the JPMorgan Equity Focus SICAV launched), JAM’s previous manager outperformed peers, but marginally lagged the S&P 500. It is noteworthy that the new strategy has outperformed both, and without any gearing. The historic performance shows that the new strategy represents an evolution rather than a revolution to the returns that shareholders have come to expect from the trust.

Kepler View

The change in manager is the latest move made by a historically very proactive board to make JAM more attractive to investment trust buyers. The new strategy is an interesting approach, with a credible performance track record, and echoes many of the trends we are picking up elsewhere in fund world (best ideas, concentrated portfolios etc).

There are good reasons why shareholders can expect an improvement in performance, with a more active approach and the considerable resources of the new team being harnessed for shareholders. Having said that, the impressive dividend growth seen over the past few years, should not be relied on to continue, with the mandate change likely to result in less portfolio income.

The board’s negotiation of further lower fees makes the ongoing charges likely to be very competitive relative to both active and passively managed strategies. As time goes on, and as the investment trust world gets to know the managers better, there is certainly the potential for the discount to narrow sustainably. Over the short term, the discount to the (admittedly income dominated) peer group average looks rather unfair.

BULL
BEAR
Interesting new strategy, which has strong track record
Managers relatively unknown in the investment trust sphere, track record will take time to develop
Large, liquid trust representing the only “core” US strategy in the investment trust sphere
Lower portfolio income, means investors can expect lower dividends going forward, all things being equal
Very low OCF
Discount relatively narrow, as such limited potential for re-rating

Portfolio

JPMorgan America (JAM) has done a good job of delivering outperformance over the long term (as illustrated in the performance section) which is a notable feat in the notoriously “efficient” US large cap sphere. However, as the discount section illustrates, the trust has traded at a persistent discount, albeit a fairly narrow one in absolute terms. Given its relatively narrow discount tolerance, this has necessitated the board to buy shares back fairly consistently over time. With net assets of £1bn, the trust has a lot of buybacks to go before its economies of scale are threatened. However, the board has taken a proactive move to make the trust more interesting and/or relevant to today’s investment trust buyer by modifying the strategy.

From 31st May, the large-cap portfolio will reflect the best growth and value ideas from the “Equity Focus” team in New York. It is worth noting that the small-cap allocation will continue to be managed by Eitan Shpiro, with weightings decided in the same manner as before (detailed later in this section). Henceforth, JAM’s new portfolio will be significantly more concentrated. To some extent, this change reflects an extension of the portfolio changes which were made in 2017 by Garrett Fish (the outgoing manager), following an analysis commissioned by the board at that time. The board’s interpretation of the analysis was to encourage the manager to increase concentration in the portfolio, but also to run winners longer.

As we highlighted in this article in July 18, more highly concentrated and “active” portfolios are becoming increasingly fashionable. This is a phenomenon well suited to managers in the investment trust sphere where the closed end structure affords more latitude to run concentrated portfolios. As has been the case with JAM, investment trust boards also provide external oversight, which means proactive and positive changes to mandates are likely to occur more often than in the open-ended fund world, ensuring trust mandates remain relevant and competitive for shareholders.

JPMorgan have prepared a comparison of what the change of manager and strategy will look like in terms of portfolio shape and quantitative factors, which we reproduce below.

Comparison of portfolios as at 31st December 2018


New Large Cap Strategy

Previous Large Cap Portfolio




Typical Holdings Range

30-40

60-100

Maximum single stock exposure

8%

8%

Expected Tracking Error Range

3-6%

2-5%

Active Share

79%

68%

3 year realised tracking error

4.32%

3.09%

Number of holdings

40

60

Largest Absolute Sector Weight

Financials (17.4%)

Information technology (20.8%)

Largest Absolute Stock Position

Microsoft (5.4%)

Apple (5.7%)

Source: JPMorgan Asset Management

Aside from the number of holdings, the key changes to the portfolio will be that each stock will reflect the best ideas from two co-managers who have worked together for around 30 years, and together run JP Morgan’s Equity Focus Strategy. In our view, a distinctive feature of the new process is that the portfolio will reflect the best ideas of two managers with very different growth and value stock selection styles. The split between growth and value is expected to remain fairly evenly balanced over time, but never more than a 60:40 tilt either way. As we discuss in the management section, the co-managers have worked together for a number of years and discussion between the two is very much part of the stock selection process. However, each manager has ultimate decision-making authority over their stocks in the portfolio, but at all times must have between 10 (minimum) and 20 (maximum) holdings at any one time. Position sizes are related entirely down to conviction levels, rather than any other considerations (benchmark constituent etc). Importantly, both managers worked alongside and contributed to the management of JAM as a closed-end vehicle, and so the ins-and-outs of trusts, boards and the subtleties of managing a trust versus an open-ended fund.

Jonathan Simon – Value stocks

As we discuss in the management section, Jonathan has worked with the heritage “Fleming” US equity team for over 30 years. His team’s “value advantage” strategy favours quality stocks with good balance sheets, and strong / experienced management teams. He looks to invest in companies which are trading well below what he believes is their intrinsic value, measured in absolute terms or relative to their long run historic valuations and peers. His turnover is expected to be in the region of 20% per annum, which correlates to an average holding period of 3-5 years. The stock universe is defined as those companies with a market capitalisation in excess of $1 billion and a P/E ratio of below 20, which currently includes approximately 700 stocks.

Tim Parton – Growth stocks

Like Jonathan, Tim looks for high quality companies which have good management teams. However, he looks for companies which he believes will have a growth rate which is significantly better than the market is pricing in. His turnover is expected to be higher than Jonathan’s at around 30-50% per annum, although he takes the same longer-term view to his holdings of 3-5 years. Tim’s universe of over 800 securities is screened for a number of factors including earnings revisions, stock price momentum and valuation measures including P/E ratio and Price/Free Cash Flow. The team’s systematic screening results in a universe of some 150 stocks which are subjected to detailed analysis and face-to-face meetings with management by the portfolio managers and sector analyst teams.

In their long experience of working together, both managers tend to have a shared market view. Within the constraint that each portfolio must have between 10 and 20 holdings, the managers have a huge degree of latitude to select stocks. However, each has the same top down risk constraints, which prevent a single stock having an active weight of greater or less than 7.5% of the benchmark. In practice, this means that no stock has to be owned by either manager. In terms of sector, both managers can select stocks from any sector, but will tend to own the majority of positions with sectors traditionally tied to their respective investment styles, for example financial services for value and technology for growth. The exposure limits to sectors of the portfolio as a whole is +/- 15% relative to the benchmark which is very wide in practical terms, and the managers do not expect to come close to this limit.

As we mention above, a proportion of the portfolio will be invested in small-cap equities. This is a continuation of the previous strategy, recognising the portfolio benefits of having small-cap exposure within the trust. On a monthly basis, JPMorgan’s quantitively driven model indicates the optimal exposure for the portfolio, and will determine that between 1% and 9.5% of NAV will be invested in a portfolio that largely replicates the JPMorgan US Small Cap Growth Fund. Currently the allocation is at the bottom end of this spectrum, at c.2.8%. This exposure is modelled in the same way as any single stock allocation and looks at five valuation criteria to determine exposure to smaller companies. Over time, according to the managers, this allocation adds performance to the portfolio (through alpha, and at times in the cycle through superior growth characteristics) as well as reducing the overall volatility of the portfolio. The small-cap portfolio is managed by Eytan Shapiro, the CIO of JPMorgan’s Growth and Small Cap US equity team.

In other respects, JAM remains the same in terms of it’s objective, and positioning. The trust aims to achieve capital growth, and is expected to provide a 'core' exposure to North American equities. The new strategy’s top ten holdings, as at 31st December 2018 were as below.

TOP TEN HOLDINGS as at 31st Dec 2018



% of Portfolio
Microsoft
5.4
Alphabet
4.7
United Health
4.6
Amazon.com
4.4
AutoZone
3.9
Ball
3.9
Delta Airlines
3.9
Apple
3.8
Kinder Morgan
3.4
MasterCard
3.3

Source: JPMorgan

In terms of weighted average market capitalisation, the new portfolio will sit slightly smaller than the S&P 500 ($189bn, vs $201bn), in-line on a P/E basis, but with higher growth (13.3%, vs 10%). The portfolio yield is 1.7%, relative to the S&P yield of 2.2%. The trust’s predicted beta of 1.07 remains similar to that of the old portfolio.

As the chart below shows, the new strategy has a high exposure to Financials and Information Technology in absolute terms. However, the biggest relative exposures (compared to the benchmark) is to Materials, whilst the biggest underweights are to Health Care and Consumer Staples.

ASSET ALLOCATION

Source: JPMorgan (31/08/2018)

Relative to investment trust peers, the new JPMorgan American will have most concentrated portfolio with the largest proportion of its assets in the top ten (at 40% of NAV). Perhaps unsurprisingly, given that the board was able to choose from 17 US equity strategies run by JPMorgan, the historic performance is excellent, both on an absolute basis, but on a risk adjusted (sharpe ratio) basis. The Equity Focus has delivered higher returns than JAM’s previous manager and the median of the investment trust peer group with lower volatility, drawdown and realised beta.

Five year NAV return and risk statistics


Return
(Cumulative)
Alpha
(Annualized)
Beta
Max Drawdown
R2
Sharpe Ratio
(Annualized)
Std Dev
(Annualized)
JPMorgan Equity Focus

107.3

-1.0

1.0

-12.4

89.0

0.8

11.1

JPMorgan American

102.5

-2.2

1.1

-14.4

95.1

0.7

11.9

Peer Group Median

89.6

-2.3

1.0

-12.6

85.9

0.6

11.8

Source: Morningstar

In other respects, JAM’s “core” positioning stands out from peers in the AIC North America universe which are either in the 'value' camp, offering relatively high dividend yields as part of their mandates, or exposed to companies with a much smaller market capitalisation. With net assets of £1bn, it also dwarfs the other trusts in the peer group. The split between “growth” and “value” means that relative to the previous strategy, the new portfolio will have less exposure to what Morningstar categorise as “value”, and more to “growth”, as the graph below illustrates.

Underlying portfolio comparison by style category

Source: Morningstar


Gearing

Gearing is periodically employed by the trust to a maximum of 20%. In the same way it has been done historically, the board sets the 'normal' level of gearing, and the managers can deviate +/- 2% from this level. As an additional protection, the managers have latitude to hold cash of up to 5% if they believe that there is a real risk of losing capital.

In June 2018, when the trust’s debenture matured, the manager requested that the target level of gearing be reduced to 5%, from 10%, reflecting market conditions. This has again been changed in October 2018, further showing Garrett’s caution, to 0% +/- 2%. The board actively monitors the gearing level and should circumstances change it has a procedure to re-set the gearing level rapidly.

Net GEARING


Source: Morningstar

Returns

As the graph below shows, outgoing manager Garrett Fish’s performance track record has been strong and consistent. The graph shows relative returns compared to the S&P 500, with an upward sloping line showing outperformance, and downward indicating periods of underperformance. Aside from showing Garrett has done a good job historically, we also believe it shows how difficult it is for the average manager (represented by the average for the closed and open-ended sectors) to outperform over the long term. Certainly, it would appear that the average manager was unprepared for the growth rally that has perpetuated the last few years.

Relative returns

Source: Morningstar / Kepler Partners

In the graph below we compare the NAV performance of JAM against the benchmark, but also the SICAV that the new managers have run. Since 2011, JAM has outperformed peers, but marginally lagged the S&P 500. It is noteworthy that the new strategy has outperformed both, and without any gearing which (as we show in the gearing section) has been a historic feature for the trust.

NAV performance vs peers and new strategy

Source: Morningstar

The graph above, as well as the statistics provided by JPMorgan on historic performance show that the new strategy represents an evolution rather than a revolution to the returns that shareholders have come to expect from the trust. As the graph below shows, the new strategy has a similar (although without doubt better) pattern of steady outperformance.

Calendar Year RETURNS

Source: Morningstar, 2019 = 1st Jan to 25th April

Dividend

As we outline in the portfolio section, capital growth, rather than dividends are the principal area of focus for the manager. As such a dividend yield does not form part of the formal objectives of the trust or mandate. However, due to tax reforms in the United States, many companies have been able to pay out large levels of income, as well as buy back their own shares. As the graph below shows, shareholders have seen the effect of this and dividends have been showing a healthy rate of increase over the past few years, led by revenue growth.

The company pays a semi-annual dividend, which last year amounted to a total of 6.5p representing a hefty 18.2% increase over the prior year. The board notes that with the adoption of the new investment strategy, there will be a material reduction in the revenue generated by the company. The trust has very healthy revenue reserves which have been built up over time, amounting to 1.5x the current dividend level. It is likely that these reserves will be required to support the dividend at the current level going forward – it has stated that it “will consider the best way to manage this outcome in conjunction with an assessment of the use of existing retained revenue reserves”.

DIVIDENDS


Source: JPMorgan

Management

The change to the management will take effect on 31st May 2019. From this date, the managers of the large-cap element of the portfolio will be Jonathan Simon and Tim Parton. Jonathan and Tim are current managers of the "Equity Focus" strategy which currently has over $2.3 billion under management. The co-managers use an unconstrained bottom-up approach to build a portfolio of high-quality companies across the value and growth spectrum.

Jonathan is a Managing Director in the Manager's US Equity Group with some 38 years' experience with the Manager and currently manages a number of US funds that follows a value mandate as well as being co-lead manager of the Manager's Equity Focus strategy. He has been an employee of the Manager since 1980 and holds an MA in mathematics from Oxford University.

Tim Parton is also a Managing Director in the US Equity Group, has been with the Manager for 32 years and manages a number of growth strategies including the Growth Advantage Fund and since 28th February 2017 has, alongside Jonathan, been the co-manager of the Manager's Equity Focus strategy. Tim holds a BSc in economics and accounting from the University of Bristol and is a member of the New York Society of Security Analysts and a CFA charterholder.

The portfolio managers are supported by a local team of over 35 research analysts with specific sector research responsibilities who are responsible for the idea generation and the ongoing monitoring of companies within their sphere of expertise.

The manager of the smaller companies portfolio is Eytan Shapiro who is the CIO of the Growth and Small Cap US Equity team and portfolio manager in the US Equity Group. A JPMorgan employee since 1985, he is responsible for managing the US small cap growth strategy, which includes the JPMorgan Small Cap Growth Fund, JPMorgan Dynamic Small Cap Growth Fund, and the JPM US Small Cap Growth Fund. Prior to joining the small cap team in 1992, Eytan worked as a portfolio manager in the firm's Hong Kong office. He had previously been an investment analyst at Phillips & Drew in London.

Discount

The board has committed to buy shares back when they stand at anything more than a 'small discount to NAV'. This policy has meant that over time, the trust has not traded at a meaningful discount. During the last financial year (to 31st December 2018), the company bought back £52.5 million worth of shares, representing 5.5% of the Company’s issued share capital at the beginning of 2018. These shares were purchased at an average discount to NAV of 5.1%.

As we show in the graph below, this has meant that the trust has traded at a consistent discount level, and at the current time (given the positive re-rating of peers on average), at a discount to peers.

DISCOUNT

Source: Morningstar



Charges

JAM’s board have succeeded in bringing the management fees in considerably over time. The current base management fee regime is that 0.35% is charged on the first £500m of net assets, 0.3% on net assets above £500m and up to £1bn, and 0.25% on any net assets above £1bn. At the time of writing, the trust has net assets of £1.025bn.

With the change in the manager, the board has been able to announce further savings, including a management fee waiver for the nine months from 1st June 2019, and the abandonment of the performance fee arrangements. As such the board forecasts an OCF of 0.2% for the 2019 financial year, and 0.33% for 2020. These moves make the trust a very attractive proposition on a cost basis relative to both actively managed funds, but also competitive against passive funds. JAM is therefore comfortably the cheapest trust in the AIC North America sector which has a simple average of 0.96%. This figure has decreased dramatically over the past two years, where the OCF was 0.55% in 2017 and 0.62% in 2016.

ESG

Important information

JPMorgan American is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed.

Please see the important information by following this link or at the bottom of the page.

Kepler Trust Intelligence is a website owned and managed by Kepler Partners LLP. Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research.

This report has been issued by Kepler Partners LLP for communication only to eligible counterparties and professional clients as defined by the Financial Conduct Authority.  Its contents are not directed at, are not to be communicated to, may not be suitable for and must not be relied on by retail clients

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country.  Persons who access this information are required to inform themselves and to comply with any such restrictions. 

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Fund History: JPMorgan American

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