JPMorgan Global Growth & Income aims to provide superior total returns over the long term by investing in companies based around the world which are benefiting the most from key themes in the economy and society.
The themes in the current portfolio include the technological – cloud computing, big data and electric cars – as well as social, for example the growing demand in Asia for financial products and the changing spending habits of millennials.
Since 2018, the board aims to pay out at least 4% of NAV in income each year, based off the NAV at the start of the year and paid in quarterly instalments. This can be paid out of capital, which means the managers, Helge Skibeli, Rajesh Tanna, and Timothy Woodhouse, have not had to change their core, valuation-sensitive approach.
The new dividend policy has seen the trust move to the AIC Global Equity income sector, where it is the second-best performer out of six members over five years in NAV total return terms. Over that period, it has delivered NAV total returns of 81%, compared with the sector average of 55.1%. The MSCI AC World index has returned 80.6% over this time.
The first step of the investment process involves the managers, supported by 81 analysts, creating industry frameworks to determine how companies will respond to structural changes. Next, the team undertakes in-depth analysis looking for companies that are trading at a discount to their forecast intrinsic value which, for the team, is determined by the company’s future cash flow stream. Earnings forecasts are then created over varying time periods and, through understanding a company’s forecast value with the current value of the business, the team is able to create a valuation rankings.
The end result is a diversified portfolio of 81 companies, with the top ten holdings making up just 25% of the portfolio. The industry and geographical exposures are purely a reflection of the managers’ bottom-up stock selection and the research conducted on structural change.
The trust yields 3.7% on a historic basis, but will pay out 4% of the NAV from the start of the 2018 financial year and in future years. Since the introduction of this policy in 2016, the trust has seen a dramatic turnaround in sentiment and, after reaching lows of close to 16% in June of 2016, the trust has spent the past two years consistently trading at a premium to NAV.
JPMorgan Global Growth & Income is an attractive trust for those looking for a relatively predictable income with some capital growth too. The trust is rigorous in its forecast-driven approach and the depth of analysis the team goes into is only possible for a company of JPMorgan’s size.
The change of income policy in 2016 has been the real game changer. The process has shown the ability to generate steady total returns over the long run, but the trust now offers a 4% dividend yield as well. Investors have clearly enjoyed the clarity of the policy of announcing the dividend for the coming year and this has been reflected in the narrowing of the discount. The trust is currently trading at a premium and we see any discount as an attractive entry point for the trust.
|Strong track record for NAV returns
||Trading at a premium|
|Excellent income source for investors since the change in policy in 2016||the income is not "natural", which some may not like|
The objective for JPMorgan Global Growth & Income is to provide superior total returns and outperform the MSCI All Country World Index over the long term by investing in companies based around the world.
At the helm of the portfolio are Helge Skibeli, Rajesh Tanna, and Timothy Woodhouse, who aim to select stocks benefiting from key themes they see driving returns over the coming years. These include the changing consumer habits among millennials as well as electric and self-driving vehicles.
Another theme that has stood out recently is the growing semiconductor market. The managers have documented that, over the past ten years, semiconductor growth has been led by smartphones, PCs and tablets. However, electric vehicles and driverless cars are completely changing the outlook of the industry. To take advantage, the managers have invested in Infineon, which has a dominant market position. The company is one of the top-three auto and industrial semiconductor companies globally and the managers believe that the market has mispriced its growth prospects. The trust also owns VW, which the managers believe has an attractive electric vehicle programme that is undervalued by the market.
The trust’s investment process has three stages. The team, supported by 81 analysts, first creates industry frameworks that help them to determine how companies will respond to structural changes and, in turn, the winners and losers going forward. Next, the team undertakes fundamental research to look for companies that are trading at a discount to their forecast intrinsic value. This is determined by the company’s future cash flow stream. Earnings forecasts are created over varying time periods and, by understanding a company’s forecast value with the current value of the business, the team is able to create a valuation rankings. The valuation rankings are split into quintiles and typically only companies within the cheapest two quintiles for valuation will be considered for the portfolio.
The end result is a portfolio of 81 holdings with a high active share of more than 80%. The average market cap of a company within the trust is $157.5m relative to the benchmark MSCI ACWI average of $129.9m. The top ten holdings make up just 25% of the portfolio and, as can be seen below, are well diversified by industry, although with a bias to technology-related areas.
top ten holdings
||Technology – Software
|United Health Group
||Health Services & Systems
||Technology – Semi and Hardware
|Bank of America
Alphabet is the largest overweight as well as the largest position. The managers believe that its potential to monetise its services is still under-appreciated by the market. Tech giants Microsoft and Amazon also feature heavily.
Industry and country positions are a result of stock selection rather than tactical positioning. That said, in the current portfolio the largest overweights come from the likes of pharma/medtech (2.4%), media (2.4%, includes Amazon) and industrial cyclical (2%), showing where the managers find the most exciting stocks. At the other end of the spectrum, the portfolio is underweight the benchmark to basic industries (-2.8%), financial services (-2.1%) and consumer cyclical and services (-1.8%).
At a geographical level, the largest overweight exposures are to Europe ex UK (4.4%), the UK (+1.9%) and the US (+1.7%). Again, the portfolio is not formed from a top down geographical approach; however, the managers recognise that it can be useful to assess whether there are any countries they are particularly exposed to as a measure for risk. Ultimately, the managers want stock picking to be the driver of returns and don’t want the effects of macroeconomic risk to outweigh the effects of stock picking. Currency exposure is predominantly hedged against the benchmark.
Geographical allocation Graph
Over the past year, the managers have moved their geographical allocations to be more similar to the benchmark, so future relative performance should depend more on stock picking rather than sector allocation. Comparing the regional allocations for 30 June 18 to 31 March 2019, the average deviation from the index weight has halved, to 2.1% from 4.3%.
The trust has structural gearing through a 30-year note taken out in 2018 at a rate of 2.93% fixed. The £30m, which was issued in 2018 to take advantage of what the managers considered to be advantageous market conditions, is worth 6.7% of NAV at current levels. The managers also have overdrafts in place to allow for short-term flexibility.
Gearing is a regular topic of discussion between the managers and the board, and is varied to reflect the outlook of the team. Over the past year, the average level of gearing has been 5.7%, with cash held against the gearing. However, the increase in gearing this year, as shown in the chart below, has been a reflection of the managers’ positivity towards investing globally and healthy earnings growth in 2019.
This is toward the lower end of the spectrum relative to the company’s gearing range (5% net cash to 20% geared) and to the others in the sector, where the likes of Murray International, Scottish American and Securities Trust of Scotland all employ double-digit levels of gearing.
Since implementing its new dividend policy, the trust has become a member of the AIC Global Equity Income sector, in which its NAV total returns look extremely favourable. The trust has outperformed the peer group significantly over the past five years, with the second-highest NAV total returns in the six-strong sector. The trust has returned 81% versus a peer group average of 55.1%, although this is in line with the index’ return of 80.6%.
performance vs indices
Although we have seen changes to the income profile of the portfolio, one thing that has remained constant are its consistent NAV total returns. The trust has only underperformed the benchmark once in the past eight years. It is also ahead year-to-date, having delivered 18.8% NAV total returns. In comparison, the MSCI ACWI has returned 16.3% and the AIC Global Equity Income sector 16.5%.
It is noteworthy, however, that these reliable returns have come at the expense of some volatility. The five-year standard deviation for the trust is 17.91%, the highest in the sector, and it has a beta of 1.06. This is also high in comparison to the previous sector peer group, the AIC Global sector, where the average beta was 0.84 and the average standard deviation was 16.7%.
Over the 12 months to the end of March, the managers had the most success in adding value relative to the index in the pharma/medtech, technology (principally software), and utilities sectors, which added 0.9%, 0.5% and 0.4% in relative returns. However, overall stock selection has been negative over the past 12 months. At a company level, the strongest contributors to performance over the past year were O’Reilly Automotive, Airbus and Tableau Software, which have impacted performance by 0.48%, 0.36% and 0.35%.
performance vs indices
A changed distribution policy was announced in the summer of 2016, whereby the board declares a dividend of 4.0% of the previous year end’s NAV, paid quarterly in October, January, April and July. Last year was the first year that this was fully implemented and has made the trust potentially more attractive to income seekers without forcing the managers to change their style and objective to maximise total returns.
Last year saw the trust return 12.16p in dividends, almost 100% more than the prior year, when it was 6.6p, and almost quadruple the level of 3.2p in 2016. The dividend may be funded out of capital, as well as from revenue returns, and last year this was necessary as the revenue return per share was just 4.24p.
At the helm of the portfolio are Helge Skibeli, Tim Woodhouse and Rajesh Tanna. The three portfolio managers work alongside a team of more than 81 research analysts based around the world who have, on average, 18 years of experience. Earlier in the year, Jeroen Huysinga, one of the company's joint-portfolio managers, announced his retirement from the team. Rajesh Tanna took over his role.
Helge has been with JPMorgan for close to 30 years and in the industry for more than 33 years. He holds the title of global head of developed market equity research, as well as the head of US research. Prior to his current role, he was head of JPMorgan Investment Management (Singapore) and head of investment for Asia Pacific ex-Japan.
Tim Woodhouse has been a member of the JPMorgan team since 2008, starting his career as a research analyst in the European equity research team working in the TMT sector. Tim obtained a BSc (Hons) in Economics from the University of York and is a CFA charterholder.
Taking over from Jeroen Huysinga in March 2019, Rajesh has 22 years of experience in the investment management industry, including 18 years as a portfolio manager. Alongside being a portfolio manager, he is also the head of the research driven process (RDP) international equity team. Rajesh moved to JPMorgan Asset Management from JPMorgan Private Bank in September 2016, where he was also a European equity portfolio manager.
Since the change of income policy in 2016, the trust has seen a dramatic turnaround in sentiment. Having reached lows of close to 16% in June of 2016, when discounts widened across the investment company universe after the Brexit referendum, the trust has spent the past two years consistently trading at a premium to NAV. Currently the trust is trading on a premium of 2.3%, marginally above the one-year average of 1.4%. The AIC Global Equity Income average premium is 0.3% when removing Blue Planet Investment Trust, which is an exceptionally small company. We think the current premium is due to the attractive 4% yield as well as clarity over the level of income in the forthcoming year, which we believe should appeal to investors relying on the income from their investors.
The board ensures it issues shares when the trust is trading at a premium, helping the trust to grow. Since the start of 2019, close to 2m of the 24m shares have been issued from treasury.
JPMorgan Global Growth & Income has an ongoing charges figure (OCF) of just 0.56%. This is comfortably the lowest fee of the AIC Global Equity Income sector, where the weighted average is 0.73%. The management fee for the company is 0.4% of net assets, again the lowest in the sector, and there is a performance fee of 15% of the annual outperformance of the company's NAV total return over the total return of the benchmark plus 0.5%. Any performance fee payable is spread equally over four years. Underperformance in any period is offset against the current accrued performance fee balance or is carried forward if no performance fee is currently due or accrued. The performance fee payable in any year is capped at 0.8% of net assets.
The trust has a KID RIY of 1.13, in comparison to a sector weighted average of 1.36. With this said, calculation methodologies for KID RIY can vary among companies.