JPMorgan Global Growth & Income (JGGI) was launched in 1887 and is listed on the London and New
Zealand stock exchanges.
JPMorgan Global Growth & Income key figures
|NAV including income||344.3p|
|Premium to NAV||3.8%|
As at 16 September 2020
JGGI is the only retail investment product offering investors access to JPMAM’s ‘global focus’ investment strategy, a research-driven approach backed by a large team of experienced sector specialist analysts.
This approach was adopted in 2008 under the previous manager, Jeroen Huysinga, who retired in early 2019. The trust is now managed by Helge Skibeli, Raj Tanna (head of the RDP international equity team) and Tim Woodhouse, who was previously co-manager with Huysinga. Between them, this team has more than 50 years’ tenure at JPMAM.
Their objective is to build a portfolio of 50-90 stocks to provide superior total returns to the trust’s benchmark, the MSCI AC World Index. The managers can use gearing tactically to take advantage of available investment opportunities. Due to its high distribution policy, JGGI is a member of the Association of Investment Companies’ Global Equity Income sector.
JGGI has recovered from the sharp sell-off it experienced at the beginning of the pandemic.
It has delivered solid total returns in absolute terms over one, three and six months, and one, three, five and 10 years.
In the three months to end-August 2020, the trust returned 8.5% in share price terms and 7.0% in NAV terms, outperforming its benchmark, which returned 6.6%. It also outperformed its benchmark over one month, three months and one year in both price and NAV terms, over five years on an annualised price basis, and it almost matched benchmark performance in price terms over 10 years. In addition, JGGI has outperformed the UK market, as represented by the CBOE UK All Companies Index, over all periods shown in both share price and NAV terms.
This performance serves as a reminder of the diversification benefits available to UK investors who venture outside their home market. JGGI has also outstripped the returns of most of its peers in the AIC Global Equity Income sector.
The main contributor to performance during the 12 months to end-June 2020 (FY 2020) was an overweight to Schneider Electric, a French electrical equipment company focused on energy management and automation. This is a long-term holding that JGGI’s managers believe is still in the early stages of realising its growth potential.
The main detractors from performance over the 12 months to end-June included overweight positions in Airbus and Diamondback Energy, both of which have since been sold.
At a sectoral level, positive contributors to performance in FY 2020 included the trust’s underweight to banks and its overweight to retail. Detractors include an overweight to industrial cyclicals and an underweight to pharmaceuticals and medtech.
INVESTMENT STRATEGY – Research delivers information advantages
JGGI is managed using JPMAM’s ‘global focus’ investment strategy, a research-driven approach based on an in-house dividend discount pricing model,
which uses cash flow projections to forecast the long-term expected returns of a company’s shares. The process was adopted in September 2008 and is
supported by a team of 81 experienced sector specialist analysts, who undertake intensive research into ca 1,200 developed market companies.
At the core of the process is the conviction that deep research will deliver an information advantage that allows analysts to identify the long-term winners and losers arising from structural changes. Analysts seek investment insights by considering structural change related to various themes, such as the changing consumer habits of millennials, the new energy revolution, electric and self-driving vehicles and the growing demand for financial products in Asia. Research of this kind underpins the trust’s investments in companies such as Coca-Cola; Infineon, one of the top three global auto and industrial semiconductor companies; auto manufacturer Volkswagen; Next Era Energy, a world leader in solar and wind power generation; and AIA, a pan-Asian life insurer with an unrivalled franchise and scale.
For each potential holding, analysts forecast earnings and cash flows over a range of timescales, with a particular focus on the longer term. The projected future value of each company is compared to its current value and ranked into valuation quintiles ranging from 1 (undervalued) to 5 (overvalued). JGGI’s investment universe is drawn largely from stocks in the first two quintiles.
To be considered for inclusion in JGGI’s portfolio, stocks must pass a further three tests in addition to being in the first two valuation quintiles. Firstly, they must have “significant profit potential”, with at least 25% earnings upside. Second, there must be an identifiable catalyst for revaluation, such as management change, corporate restructuring or expansion into new markets, which has the potential to change market perception of the company. Finally, the catalyst must be expected to occur within the next six to 18 months. This selection process leads to the creation of a portfolio of between 50 and 90 ‘best ideas’ holdings.
Portfolio turnover has historically been between 60% and 80% a year, implying an average holding period of around 18 months. As JGGI only selects stocks from the first two valuation quintiles, a significant revaluation would be likely to spark a sale, and the managers also have an active approach to topping up or trimming positions.
The coronavirus crisis has not undermined JGGI’s investment process. The strong collaboration between research analysts and the managers has continued virtually and, according to the managers, access to companies has actually improved as virtual meetings face fewer scheduling constraints.
THE MANAGER’S VIEW – opportunities despite uncertainties
The managers expect the severe contraction in global economic growth to persist in the near term, with
a slow and bumpy path to eventual recovery. They expect surges in the incidence of the virus in particular areas to hamper the recovery until a vaccine is available. Co-manager Tim Woodhouse believes investors face significant and unusual uncertainties at the moment: “With many companies reluctant to give earnings guidance, how can investors be confident of those companies’ outlooks?” he asked. He and his colleagues foresee further market volatility in coming months.
Despite these uncertainties, JGGI’s managers hold the view that while equity valuations may be looking
stretched on some measures, especially in the US, the case for equities remains attractive even after the
summer rally. They expect ongoing investor appetite for equities to be supported by the fact that returns from bonds and cash are likely to remain very poor as interest rates slowly normalise. In Woodhouse’s view, the gains made by the tech mega-caps are justified: “These companies have been able to take a step forward thanks to the virus,” he said. He cited the success of Amazon, a top three holding, in growing Amazon Prime and its grocery delivery business as one example; and the boom in demand for the video conferencing services provided by Microsoft Teams and Zoom as another. Microsoft is JGGI’s second largest position after Alphabet, the parent of Google. “These names are transforming the world. They are structural winners from the crisis and will continue to thrive,” Woodhouse said.
However, he argued that many other high-quality names have been left behind; companies with steady growth and high returns that face short term disruption and have been overlooked, even though they are unlikely to be challenged over the longer term. He and his colleagues see many opportunities, especially in the travel sector, and among consumer cyclicals and house-builders. Woodhouse singled out American Express. Its revenues have been hit by the fall in spending on travel and entertainment and associated concerns about loan losses.
However, American Express’s loan book has always been high-quality and the manager is confident consumer spending will eventually recover and Amex will benefit when it does, regardless of whether the spending is done on UK staycations, the local high street or on holidays abroad. Mastercard, a top 10 holding, is also set to benefit from any resurgence in consumer spending.
JGGI’s managers also see value in Lyft, a US ride-share company. This company had suffered a sharp drop in demand since the onset of the pandemic, and its share price declined accordingly. However, its balance sheet is very strong; it entered the crisis with $2.8bn in net cash and JGGI’s managers estimate that even a 60% reduction in rides in 2020 and 2021 will still leave Lyft with $1.0bn in net cash and no leverage at the end of 2021. It also has duopoly power, as the US ride share market has already consolidated and is dominated by Lyft and Uber, so the managers expect Lyft’s business model to prove very profitable in a few years’ time. They recently acquired a position in the stock at a very attractive level. “It is a great name for the long term,” said Woodhouse.
The managers also opened a position in UK housebuilder Taylor Wimpey in June and have added to it since, as its share price traded near its Brexit lows. As with Lyft, the managers have drawn comfort from Taylor Wimpey’s strong balance sheet and Woodhouse said the company’s management has made some good decisions since the onset of the crisis. It paused dividend payments and raised £500m, not to shore up its balance sheet, but to go on the offensive, by adding to its land bank at a time when land prices are low. It has so far spent £350m on land purchases. Taylor Wimpey also increased its prices by 1% in July and is expected to do the same again in September, and Woodhouse expects the company to reinstate its dividend next year.
JGGI is overweight the UK, which partly reflects the fact that the managers are not excessively concerned about the impact of Brexit. Although the UK’s near-term political and economic outlook is uncertain, Woodhouse and his colleagues are confident in the long-term flexibility and resilience of the British economy and the UK companies they hold.
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