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.