JPMorgan Asia Growth & Income (JAGI) uses detailed fundamental research done by a team of over 40 investment professionals to identify superior growth companies in the Asia Pacific region. The team aim to take a long-term view, and look through the volatility and unpredictability often found in the economies, markets and politics of Asian countries.
As such, the process depends less on one or a few people making the right calls again and again, but more on a wide, experienced team implementing a sound strategy consistently. The trust has performed extremely well in recent years with minimal levels of gearing. As we discuss in the Performance section, JAGI is the second-best performer of all Asia Pacific trusts (growth or income) over five years, almost entirely down to strong stock selection. It has outperformed a passive investment in its benchmark index in each of the past seven years.
JPMorgan Asia Growth & Income, renamed from JPMorgan Asian in February 2020, pays 1% of NAV each quarter as a dividend – out of capital if necessary. Since implementing this policy in 2017, the discount has generally been in single digits, having been in double digits previously – it is now 1.3%.
The portfolio continues to be managed – as it has always been – for capital growth, despite the new dividend policy. JAGI offers more exposure to ‘growthier’ sectors, such as information technology and consumer discretionary, than the typical income trust. This has helped JAGI to outperform the other AIC Asia Pacific Income trusts on a total-return basis while offering a comparable yield.
JAGI offers a highly attractive combination of growth and income. The focus on capital growth in stock selection means that the trust has exposure to areas of high secular growth such as information technology and consumer discretionary, while the dividend policy means that it could sit well in an income seeker’s portfolio. In particular, as we discuss in the Dividend section, we think the diversification it would bring to the biases of the average UK equity income fund could be valuable to many yield-seeking investors.
We think the strategy is a highly attractive way to invest in Asia. However, it is an inherently volatile continent, as early 2020 reminded us. Following on from the US–China trade war of 2016 and beyond and the Hong Kong protests of 2019, coronavirus is just the latest macroeconomic and political issue to have roiled markets. We can’t see how a fund manager could be expected to generate alpha consistently by correctly charting the course of these events and positioning their portfolio appropriately. The bottom-up, stock-specific approach of JAGI, along with a time horizon long enough to allow most macro and political movements to wash out, seems to be an ideal approach to this volatile region.
Asia Pacific income trusts have tended to trade close to par in recent years. As such, we don’t think the 1.3% discount is overly tight and would expect JAGI to trade close to par over the medium term.
|A dividend yield not dependent on portfolio income||Due to investing for capital growth, might not provide the defensive qualities of a traditional income strategy|
|Tilt to growth areas not commonly focussed on by equity income portfolios||China is over a third of the benchmark, so investors take some single-country risk|
|Strong and consistent track record of outperformance through stock selection||Asia remains a volatile region with serious political and economic risks|
JPMorgan Asia Growth & Income (JAGI) leans on the detailed stock-selection work of a huge team of investment professionals across Asia, with the aim of generating significant long-term outperformance of the MSCI AC Asia ex Japan benchmark. The trust’s portfolio is managed by Ayaz Ebrahim, Robert Lloyd and Richard Titherington, senior members of JPMorgan’s Emerging Markets and Asia Pacific (EMAP) equities team. They draw on the detailed bottom-up research of 36 analysts based across the Asia Pacific region, working to a defined framework which allows cross-border comparisons.
The basic philosophy is to focus on identifying superior-quality growth stocks, trying to look out further than the market and holding on to stocks through economic and market volatility. The managers believe this is a more reliable way to generate outperformance than trying to forecast the short-term course of national economies and tilting their exposures on that basis. The table of top ten holdings (below) illustrates how the focus on finding companies which can generate superior growth rates sustainably into the future has led to major positions in those serving secular trends. These trends are of consumption growth, technological advancement and demand for sophisticated financial products. As much as 49.9% of the portfolio is in the top ten holdings, meaning the portfolio is concentrated and individual stock selection more likely to drive returns (this compares to 30.3% in the MSCI AC Asia ex Japan benchmark).
top ten holdings
|Ping An Insurance
|China Construction Bank
|China Resources Land
Source: JPMAM, as at 31/01/20
The majority of the EMAP analyst team are organised by sector, meaning they compare companies across the region. In a globalised economy, we believe this is increasingly the most relevant way to consider stocks. The analysts are tasked with identifying superior companies on three metrics: economics, duration and governance. Economics refers to the ability of a company to generate superior earnings and cash generation, whereas duration refers to a company’s ability to do so persistently into the future, and governance aims to isolate the risks to shareholder value from poor corporate governance.
Having considered these three areas, the analysts allocate a stock to one of three silos: ‘Premium’, ‘Quality’ or ‘Trading’. Premium companies are considered to have high-quality earnings and governance, with the ability to maintain their advantages long into the future. Quality companies are those which might have strong growth prospects but less defensible positions, so their superior growth is less likely to be long term. Trading companies are generally of poorer quality, but might be considered for a shorter-term investment if valuations or cyclical conditions become attractive. JAGI’s portfolio is expected to be mostly invested in Premium and Quality stocks, with a smaller allocation to shorter-term trading opportunities.
Analysts then compute five-year expected returns for their stocks, derived from their expected earnings growth, dividends, currency moves and changes in valuation multiples. Interestingly, a comparison of the current year and near-term growth and valuation metrics shows limited variance from the MSCI AC Asia ex Japan benchmark (as shown in the table below). However, it is the growth rate expected three to five years out which really separates the two. This underlines how the analysts aim to get their edge by forecasting out further than the average short-term investor.
|12- month Forward Price to Earnings (x)
|Price-to-Book Ratio (x)
|Dividend Yield (%)
|Return on Equity (%)
|Five-year expected growth (%)
Three- to Five-year EPS Growth (%)
|Number of issuers
|Net debt to equity (%)
Source: JPMAM, as at 31/12/19
JPMorgan has invested significant resources in expanding its Asia and emerging markets team and improving their processes and resources. Notably, in 2015 the emerging markets and Asia teams were combined and committed to the same stock-selection framework. Recent years have seen the addition of dedicated China A-Shares analysts based in mainland China who research domestically listed stocks. Refinements have also been made to how macroeconomic and country-specific views are incorporated within the process.
Sitting within the EMAP team are country specialists – portfolio managers (PMs) of dedicated single-country or regional funds. These PMs also give their input into stock selection within the context of their country-specific knowledge, attend company meetings and contribute to a 1-to-5 ranking of conviction in the stocks. The EMAP team also have four dedicated macro and quant analysts who run multi-factor models on the individual economies in the region and rank them in terms of attractiveness. This is used to guide geographical allocation, mainly as regards the smallest bucket in the portfolio, ‘trading’. Given that the expected holding period for Premium and Quality stocks is five years, the models are generally too short term to apply. The chart below shows that as a result, the portfolio has fairly small active weights to the countries in the index. Historically, far and away the largest contributor to relative returns has been stock selection rather than country allocation, as we illustrate in the Performance section.
The team’s macro valuation models also come into play when considering the gearing, and are the major reason why the trust has not been geared since the start of 2017. This is only likely to change when the models show significant value across the market, which is likely to happen after a major sell-off or turning of the cycle.
Sector weights are more significant, as can be seen below. However, allocations are driven by where the stock-specific opportunities are, rather than a decision to be overweight to the sector per se. Financials, information technology and consumer areas dominate the portfolio in absolute and relative terms, in contrast to the typical weight of an equity income portfolio (particularly in the UK).
JAGI’s board has given the manager discretion to borrow up to 20% of NAV, and it has facilities in place to do this. However, the trust is not geared at the moment, and hasn’t been since the start of 2017. This is because the managers use valuation signals from their macro models to decide when to gear, but since the rally in 2016 these models no longer indicate extreme levels of undervaluation. The managers anticipate this will remain true while Asian equities are trading near or above average valuations. The team therefore believe it is prudent to be cautious with gearing, given the volatile nature of Asian markets. Notably, over five years the trust has outperformed its benchmark and all but one of its peers in the Asia Pacific and Asia Pacific income sectors, despite having low or no gearing through the period. The three peers in the Asia Pacific income sector have all had modest structural gearing through much of this time, as have a number of those in the Asia Pacific sector.
JAGI’s performance has been outstanding for quite some time. The trust’s NAV has outperformed a passive investment in its benchmark index (represented by the iShares MSCI AC Asia ex Japan ETF) in each of the last seven calendar years. Impressively, the trust outperformed in the sharp rally of 2017, as well as in the last two down years of 2015 and 2018. The below chart also considers the Morningstar Asia Pacific Income sector, although the dividend policy which qualifies JAGI for the sector was not implemented until 2017. Given the other trusts in that sector deliver a natural yield, they have been less focussed on high-growth areas and have therefore lagged JAGI since that year.
Over the five years to February 11 this year, JAGI has substantially outperformed not only the ETF tracking its benchmark, but the average Asia Pacific income trust in NAV total-return terms. In fact, looking across the income and growth sectors for the Asia Pacific region, JAGI is the second-best performer of the 12 trusts, up c. 83% over five years.
Stock selection has been the overwhelming contributor to this outperformance, rather than sector or country allocation, in line with the aim of the strategy. In fact, on a country basis, stock selection is responsible for 28.2 percentage points of the outperformance over five years (to 31 December 2019) out of a total 32.4 percentage points (according to JPMorgan figures). In our view, this underlines the strength of the approach and the benefit of having the resources of JPMorgan’s Asia team behind the trust.
The best-performing stock picks have tended to be those benefitting from the increasing sophistication of financial services and consumer demand in Asia, as well as the increasing sophistication of technology globally. Over three years, Ping An, Shenzhou International Group and TSMC have been the greatest contributors to relative performance. Ping An is a Chinese insurer expanding rapidly as richer Chinese consumers demand more sophisticated financial products. Shenzhou International is a clothes manufacturer which sells both into China and overseas. TSMC is the world’s largest semiconductor producer, which serves Apple and Huawei amongst other global heavyweights. Clearly, in recent years the internet-related technology and consumer discretionary stocks have been major drivers of the market. JAGI has benefitted from being overweight to Tencent and Alibaba, but has also benefitted from being underweight to Baidu, indicating that it has not just been surfing the ‘tech’ wave but adding significant value through the stock-selection process.
Over the past year JAGI has also outperformed the ETF and the sector, returning 11.9% in NAV TR terms compared to 8.4% for the ETF, and the same for the sector average (to 11 February). Stock selection has still been far more important than country or sector selection. In particular, aside from the decision to be overweight to TSMC, picking the right stocks in China has been hugely beneficial.
Events have moved fast in recent weeks, and the market has sold off significantly in Asia since February 11 on concerns about the spread of COVID-19. It is unsurprising that with a portfolio invested heavily in North Asia and cyclical sectors, JAGI has lost slightly more than the market over this very short period.
One of the key attractions of JAGI, aside from the consistency of historical outperformance, is its dividend yield. In 2017 the board took the decision to significantly increase the payout, and the board now aims to pay 1% of NAV each quarter as a dividend, paying out of capital when necessary.
Given the NAV moves over time, the actual level of dividend paid (in pence) is likely to vary from quarter to quarter, depending on the course of markets. In the 2019 financial year the dividend was held at 15.7p for the year, thanks to the falls in the first quarter (in calendar-year terms, the end of 2018).
As such, in historical terms (as it is usually cited) the dividend yield is 4.3%, thanks to the growth in NAV since the last dividends were paid. On a forward-looking basis, given the share price is currently very close to NAV, it is fair to expect that investors should receive a dividend which represents a 4% yield on the share price. We also note that the portfolio is likely to offer significant diversification from the UK equity income trusts that are widely held by UK investors. For example, the FTSE 100 has less than 0.61% in information technology stocks, compared to the 19% of JAGI.
As we discuss in the Discount section, the introduction of the higher level of dividend has had a marked effect on the share-price rating, and the discount has moved in significantly. Aside from the one-off benefit to shareholders of having a narrower discount and (one would hope) lower discount volatility, the other benefit of paying a dividend from capital is that investors can benefit from a higher income. However, with JAGI the managers don’t have to change their investment process to achieve this. As the Performance section shows, in JAGI’s case this has led to a significant outperformance of peers over the last few years, relative to trusts in the AIC Asia Pacific Income sector which generate income ‘naturally’. This has been partly achieved thanks to a far greater investment in the consumer discretionary area than these peers, which is possible thanks to the lack of a natural-income mandate.
JAGI’s investment strategy is run by the Emerging Markets and Asia Pacific (EMAP) equities team at JPMorgan. Ayaz Ebrahim and Richard Titherington were joined as named managers by Robert Lloyd in August 2018. Richard, who heads the EMAP equities team, works together with Ayaz on the top-down analysis and asset allocation, while Ayaz manages the trust on a day-to-day basis and leads on the stock selection. Richard has been with JPMorgan for three decades, and Ayaz joined in 2015 from Amundi; the latter heads up the Asia Pacific asset-allocation committee. Robert, with 12 years’ experience with JPMorgan, has run Asian portfolios since 2014 and manages several Asian regional portfolios together with Ayaz. His addition bolsters the team’s resources, particularly in stock selection. For insights, the managers can call on both the analysts and the country-specialist portfolio managers within the EMAP team.
The foundation of the strategy is the idea generation done by the extensive analyst team. Stock analysis and ideas come from both sector specialists, who tend to focus on the large caps in their industries, and product analysts, who are focussed on small- to mid-cap companies by geographies. As discussed above, JPMorgan has made large efforts to expand its coverage within China, and 12 members of the overall research platform are dedicated to covering the Greater China region. A Shanghai office, which has been operating under a Wholly Foreign Owned Enterprise licence since late 2016, is staffed with four analysts already, with more potentially to come.
The introduction of the new dividend policy in the 2017 financial year has had a marked effect on the discount, and increasingly the trust has traded on a rating closer to the other Asia Pacific income trusts’. The discount at the time of writing is 1.3%, compared to an AIC Asia Pacific Income sector average of 1.4%. Notably, the discount has been introduced in the past few months, as the below chart shows. We have included the AIC Asia Pacific Income sector average in green, and the Asia Pacific sector average in black. We think this recent move in the discount is likely to be down to a recognition that JAGI has been one of the best-performing trusts in NAV total-return terms over one year in the combined peer group of the Asia Pacific and Asia Pacific income sectors, and as a result has been over three years too.
The board has stated that, as far as possible, it will use its buy-back powers to keep the discount narrower than a range of 8% to 10%. However, this is clearly a loose guide and dependent on market conditions, as no shares have been bought back since early 2017 despite JAGI’s discount widening past this for much of 2018. We would anticipate discount volatility being lower in the future, thanks to the demand for income-generating trusts.
JAGI’s ongoing charges of 0.74% make it the cheapest of the four trusts in the AIC Asia Pacific Income sector. This is aided by the low management fee of 0.6% of market cap. The percentage charged is the lowest in the sector, while it is the only management fee that is charged on market capitalisation rather than net assets, meaning that the fee is reduced when the trust is trading on a discount. We like this feature, as it incentivises the manager to close the discount through strong performance. There is no performance fee, and the KID RIY is 1.36% compared to a sector weighted average of 1.69% (although methodologies can vary).
ESG is fully integrated into the stock-selection process of the whole EMAP team through the risk assessment which is completed as part of the company research. Each analyst completes a 98-question checklist regarding the risks of investing in each company. Three-quarters of these questions are focussed on corporate governance or other ESG issues, including those regarding emissions, other environmental issues and labour relations. The managers believe that the answers to the ESG questions are a strong indication of the quality of a company, although they have no set rules on not investing in companies because of certain answers (i.e. they have no negative screens). However, an assessment of these risks is factored into any buy or sell decision, with a greater expected return required for a riskier stock. The managers also engage with portfolio companies on ESG matters to encourage better practices, and governance specialists regularly attend company meetings alongside investment analysts.
While we think the integration of ESG issues is likely to be appealing to investors who value such matters highly, we note that there is minimal reporting on the engagement the managers have with companies. This step might nevertheless make the trust more appealing to ESG-minded investors. We also note that while the concentration on higher-quality companies in the universe should mean the overall number of ‘red flags’ (or poor answers to the checklist questions) is low, there is no reporting on the specific areas of concern in stocks which do make it into the portfolio.