JPMorgan Asian aims to produce long-term total returns by using its extensive research capacity in Asia to generate alpha from stock-picking. The managers, Ayaz Ebrahim, Richard Titherington and Robert Lloyd, believe that it is earnings growth and dividends which determine returns in the long run, and so the process is heavy on fundamental research and designed to look through macro-economic issues to the potential in the stocks below.
The process has been proven to work in recent years, with the trust outperforming in each calendar year since 2015, with the bulk of the alpha coming from stock selection. In particular, stock picking in China has been key, and JPMorgan have invested heavily in this area to facilitate this, and continue to build out their research capability in the local A-Shares market, which is increasingly being absorbed into the global financial system.
Although the managers bear ultimate responsibility for selecting the stocks, the process depends less on one or a few people making right calls consistently, but more on a wide, experienced team implementing a sound strategy consistently.
The trust has no gearing at the moment, reflecting the manager’s views on the valuation of the market. In fact, it has not been geared since the start of 2017, making the outperformance in the sharp market rally of 2017 especially noteworthy. This cautious positioning helped the trust outperform in the down market of 2018, although we understand it would take a significant shift down in valuations for gearing to be taken out.
The trust pays out 1% of NAV each quarter as a dividend, paying from capital as necessary. The implementation of this policy in 2016 led to the discount narrowing significantly, and the trust now trades on a 7.7% discount, having tended to trade above 10% prior to the policy change. The yield on the current share price is 4.2%.
The OCF of 0.75% is the cheapest of the five trusts in the AIC’s new Asia Pacific Income sector, despite the fact the trust is not the biggest – meaning the lower costs are not just a result of economies of scale. The management fee is charged on market cap, not NAV, which gives the manager an incentive to close the discount further.
The track record of the trust since the Asian and Emerging Markets analyst teams were combined in 2016 has been excellent, and it is impressive that the outperformance has come with limited gearing in 2016 and none in the rally of 2017. We think the disciplined approach to stock selection and market analysis is a key advantage, all based off the extensive resources that JPMorgan can apply to both areas. In particular, we are wary of trying to time the markets in the current macro-economic environment – it is hard to read the US economy, US policy and the future of the confrontation with China, all of which are crucial to the short-term market movements in Asia.
JPMorgan Asian’s process is designed to cut through these unpredictable factors to the real long-term drivers of company performance: earnings and dividend growth. We also take comfort from the fact that the current positioning of the trust is more exposed to domestic Asian growth than the sectors troubled by the trade war with the US. In all we think this trust is an excellent core long-term play in the region, and could also suit those who are more cautious on the immediate prospects for Asia, wanting exposure to a high quality team but to take the edge of market exposure.
|A track record of excellent stock-picking backed by insights from an on-the -ground research team
||The dividend is likely to fluctuate given it depends on NAV not income
|A discount wider than the average of peers despite strong NAV performance
||Gearing has always been conservative, which could hold the trust back in rising markets
|A 4% dividend yield paid from capital and not provisional on portfolio income
||China is over a third of the benchmark, so investors take some single country risk