Stock selection skills delivering strong performance

JPMorgan Global Growth & Income 28 April 2022 Review
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JPMorgan Global Growth & Income

Stock selection skills delivering strong performance

Investment trusts
Global equity income

28 April 2022

Price

451p

Market cap

£738m

AUM

£726m

NAV*

435.8p

Premium to NAV

3.5%

*Including income. As at 1 April 2021.

Yield

3.8%

Ordinary shares in issue

163.6m

Code/ISIN

JGGI

Primary exchange

LSE

AIC sector

Global Equity Income

52-week high/low

474.0p

411.0p

NAV* high/low

462.2p

400.4p

*Including income

Net gearing*

0.8%

*As at 26 April 2022

Fund objective

JPMorgan Global Growth & Income aims to provide superior total returns and outperform the MSCI AC World index (in sterling terms) over the long term by investing in companies based around the world, drawing on an investment process underpinned by fundamental research. JGGI makes quarterly distributions, set at the beginning of each financial year, with the intention of paying a dividend equal to at least 4% of NAV at the time of announcement.

Bull points

Outperformance over the short and long term.

Offers a competitive and rising dividend which can be part-funded from reserves, freeing the managers from the need to invest solely in high-income stocks.

The strategy is supported by the significant research resources and expertise of JPMorgan Asset Management’s large global equity team.

Bear points

Performance is now more reliant on a continued rotation into cyclical and value stocks.

The portfolio is underweight emerging markets, when measured according to country listing.

The new tiered management fee is higher than the previous flat fee, although the performance fee has been abolished.

Analysts

Joanne Collins

+44 (0)20 3077 5700

Sarah Godfrey

+44 (0)20 3681 2519

JPMorgan Global Growth & Income is a research client of Edison Investment Research Limited

JPMorgan Global Growth & Income’s (JGGI) managers, Helge Skibeli, Rajesh Tanna and Tim Woodhouse, look for long-term structural winners, but they are also ’leaning into the recovery’, taking advantage of the investment opportunities they see among good companies yet to realise the full benefit of the global economic reopening. The managers’ stock selection skills have ensured that the trust has outperformed its benchmark, and its peers, over the short and long term, with an average annualised return of 14.9% (NAV) and 13.7% (share price) over the 10 years to end March 2022, compared to a benchmark return of 12.7%. This strong performance has allowed JGGI to deliver competitive and rising dividends. Its current yield is 3.8%. JGGI is due to merge with Scottish Investment Trust (SCIN) by the end of Q222, a move which will almost double its assets under management to £1.3bn and reduce ongoing charges (please refer to our last note).

NAV performance relative to benchmark over five years

Source: Refinitiv, Edison Investment Research. Note: Total returns in sterling.

The analyst’s view

Investors are likely to be attracted to JGGI due to its managers’ proven stock selection skills, its strong performance track record and global focus, which offers investors diversification away from the UK stock market.

The forthcoming merger with SCIN improves the investment case for JGGI, as it will almost double in size, to £1.3bn, with greater liquidity and lower costs than previously.

JGGI’s dividend policy, which pays out at least 4% of NAV at the end of the previous financial year, part-funded from reserves if necessary, should appeal to investors seeking a competitive, predictable and globally diversified income.

Premium supported by high dividend policy

JGGI’s share price has traded at a small premium to cum-income NAV for several years, supported by its high distribution policy and its strong performance. The board has scope to allot up to 10% of shares each year to manage the premium to NAV, and regularly makes small issuances.

Market outlook: Supported by earnings and yields

So far, the global recovery has been swift, aided by the fact that it was caused by a pandemic, rather than major economic imbalances, so activity has been much quicker to rebound than at the time of the last major recession, which was triggered by the global financial crisis and required a major, and painful, restructuring of the international financial system. In addition, the extent of monetary and fiscal stimulus to support the current recovery has also been unprecedented, especially in the United States, where generous income support, combined with a build-up of household savings during lockdowns, is underpinning retail spending. After contracting by 4.5% in 2020, GDP in the advanced economies rebounded by 5.2% in 2021.

However, the Russia’s invasion of Ukraine in late February 2022 has darkened the global economic outlook considerably, by driving up energy prices and adding to existing pressures on many other commodity prices. In addition, ongoing supply chain constraints, especially a shortage of semiconductors, are delaying the production and delivery of vehicles, white goods and many other consumer electronic goods. Together, these developments suggest that growth this year and beyond may be somewhat less vigorous than previously expected.

This is certainly the view of the International Monetary Fund (IMF). In its latest round of global economic growth projections, published in late April 2022, the IMF has decreased its forecasts for growth in the advanced economies to 3.3% in 2022 (from 3.9% in its last forecasting round) and 2.4% in 2023 (down from 2.6% previously). In addition to slower growth, there is also an increasing chance that recent increases in inflation will become embedded in inflation expectations and compel central banks to raise interest rates more quickly than currently expected.

Despite these risks, global equity markets have performed strongly, supported by the improving economic outlook and, in recent months, by the sharp recovery in corporate earnings, especially in services such as the travel and leisure industries, which were forced to a standstill by the pandemic. The MSCI AC World Index quickly reclaimed all the ground lost at the onset of the pandemic and has since climbed to all-time highs in early 2022, before giving back a small portion of these gains since the beginning of Russia’s invasion of Ukraine.

Exhibit 1: Market performance and valuation

Global and UK index total returns over five years (£)

12-month forward P/E valuations of Datastream indices (at 26 April 2022)

 

Last

High

Low

10-year
average

Last as % of
average

Europe

13.1

17.7

9.2

14.2

93

UK

11.5

15.7

9.4

13.4

86

US

18.7

23.6

11.9

17.4

107

Japan

13.0

18.6

10.5

14.2

91

World

15.3

20.0

10.6

15.2

101

Source: Refinitiv, Edison Investment Research

JPMorgan forecasts that the earnings recovery will continue over the next couple of years. After rising by 45% in 2021, it expects earnings to rise by a further 15% this year and 6% in 2023, close to the long-term average. This should provide ongoing support for global equity markets for the remainder of this year and beyond, especially as earnings and free cash flow yields are still attractive compared to bond market yields. For example, in the US market, JPMorgan forecasts 2023 earnings and free cash flow yields of more than 5.0%, well above current 10-year corporate bond yields of around 3.4% and double the yield on 10-year US Treasuries. The gap between equity and bond market yields is even more marked in European and UK markets, where equity market yields are even higher, while corporate and sovereign debt yields are lower. Furthermore, European and UK markets, along with Japan, are all trading at attractive valuations on a forward P/E basis, relative to their long-term averages (Exhibit 1, right-hand side).

The fund managers: Skibeli, Tanna and Woodhouse

The managers’ view: Still leaning into the economic recovery

JGGI’s manager Tim Woodhouse describes the current economic backdrop as ‘complex’, as the war in Ukraine has pushed up oil, gas and some commodity prices, compounding existing concerns about inflation. However, he and his colleagues are relatively sanguine about the inflation outlook. He acknowledges that wages are rising due to labour shortages driven by structural shifts in the employment market. For example, in many countries, low-wage migrant workers returned home at the start of the pandemic, and some older workers opted to retire. However, Woodhouse believes these pressures will dissipate over time. He also expects house price inflation, at least in the US, to be dampened by recent mortgage rate rises. Most US mortgages are fixed for the duration of the loan, which is usually 30 years, so rising rates only affect homeowners when they move house. The manager also expects base rate effects to lower headline inflation readings in the coming months.

Woodhouse and his colleagues are also relatively positive about the outlook for the global economy and equity markets. Their central scenario is that while global GDP growth will slow due to inflation and interest rate increases, recession will be avoided, except perhaps in Europe, which is more vulnerable due to its proximity to the conflict in Ukraine and its reliance on Russian energy exports. They expect oil prices to stabilise at current levels, which they believe industry and consumers are capable of absorbing. Corporate debt is low and, with margins at a two-year high, the managers believe companies have scope to absorb increases in the price of energy and other inputs. At the same time, consumers’ balance sheets are healthy, and household debt has fallen thanks in large part to generous government income support during the pandemic. These factors, combined with pent-up demand for larger consumer items such as cars, should support consumer spending.

On the downside, the managers expect companies will remain challenged by supply chain issues, especially shortages of semiconductor chips, which are experiencing ever increasing demand, not just from electric vehicle (EV) manufacturers, but also from producers of a broad range of other items such as household appliances, mobile phones and wearable tech. Woodhouse notes that chip shortages are being exacerbated by the rolling closures of Chinese factories subjected to ongoing coronavirus restrictions.

Under this scenario of manageable inflation and continued growth, Woodhouse believes markets look ‘quite attractive’ and he is confident that stock markets can make further gains, as the economic cycle moves from recovery to mid-cycle phase, although the path may not always be smooth. In the managers’ view, it is therefore more important than ever to remain fully invested and focused on finding great businesses that will provide superior returns and outperform over the long term. Woodhouse and his colleagues see attractive investment opportunities, especially among some cyclical and value stocks. They believe investors remain unduly sceptical about the prospects of some of these stocks, which are set to benefit as the recovery gains momentum. As a result, such stocks have lagged the rise in the overall market, remaining undervalued, thus creating opportunities to invest in recovering businesses at relatively attractive valuations. The recent market sell-off triggered by Russia’s invasion of Ukraine has created further opportunities to invest in quality companies at more reasonable levels.

Asset allocation

Current portfolio positioning

The arrival of effective vaccines in late 2020 greatly improved the economic outlook and the prospects of cyclical companies severely affected by the pandemic. Many of these companies were trading well below their intrinsic value, prompting JGGI’s managers to trim exposures to some of the biggest ‘structural winners’ of the pandemic such as major, expensive tech names and semiconductor producers, and pivot into more attractively priced cyclicals such as Lyft, the US’s second largest ride sharing company, several restaurant chains and other names exposed to the return of leisure travel, including budget airline Ryanair and Airbus, the French aircraft manufacturer which is taking market share from Boeing, Mastercard and Booking.com. They also increased exposure to banks, in anticipation of eventual rises in interest rates, which will improve bank margins, and industrial names such as Schneider Electric, a French energy management and industrial automation company.

The managers have characterised these acquisitions as ‘leaning into the recovery’, and they continue to do so. Many of the cyclicals acquired over the past year have done very well, prompting them to take some profits. For example, they trimmed Norfolk Southern, a US rail company and sold a long-term holding in O'Reilly Automotive, a US supplier of car parts and accessories, whose valuation was looking very stretched. The managers also sold Comcast, a US cable TV company on valuation grounds, replacing it with Charter Communications, another, more attractively priced cable company. A position in Ryanair was also closed, as the company has less scope that its competitors to absorb rising fuel costs.

However, as discussed above, many other solid companies are yet to realise the full benefit of the reopening and recovery and remain undervalued accordingly, especially after the recent market sell-off. These are the businesses now being targeted by Woodhouse and his colleagues. Recent acquisitions include McDonald's and Marriott Hotels (now a top 10 holding), whose franchise structures provide steady fee income and protection from wage pressures. The trust’s exposure to American Express has been increased (also now a top 10 holding), on the view that higher inflation will bolster revenues. The managers have also increased the position in Booking.com, as they consider this a ‘world leader’ in accommodation and other travel services.

Exhibit 2: Top 10 holdings (at 31 March 2022)

Portfolio weight %

Company

Country

Sector

28 March 2022

29 March 2021*

Amazon

US

Media

5.6

3.9

Microsoft

US

Tech - software

5.1

4.3

American Express

US

Banks

2.9

N/A

LVMH

French

Retail

2.7

N/A

Bank of America

US

Banks

2.3

N/A

Mastercard

US

Financial Services

2.2

2.5

VINCI

France

Industrial cyclicals

2.2

N/A

NXP Semiconductors

Netherlands

Technology - semi & hardware

2.2

3.1

Norfolk Southern

US

Transportation

2.1

N/A

Marriott

US

Consumer cyclicals

2.1

N/A

Top 10 (% of portfolio)

29.4

31.1

Source: JPMorgan Growth & Income, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in end-March 2021 top 10. **Parent of Google.

They have also recently acquired some new industrial cyclical names, including Ingersoll Rand, a US producer of specialist industrial machinery which the managers expect to benefit from a recent merger with its competitor Gardner Denver. They have also added to their exposure to US semiconductor manufacturers Lam Research Corporation and Texas Instruments, as demand for these products keeps improving. The war in Ukraine has prompted the managers to add a new position in Baker Hughes, a US oil and gas equipment services company, which is likely to see an increase in demand as western nations seek to reduce their dependence on Russian oil and gas.

The managers’ ongoing efforts to maintain exposure to the global economic reopening has ensured that several cyclical stocks feature in JGGI’s top 10 holdings (Exhibit 2). However, media and tech stocks are also well-represented in this list. Amazon, the internet retailing behemoth, is currently the trust’s largest position, following a recent top-up. The managers have a strong conviction in this company, which they view as a ‘best of the best’ premium company. Its retail business is still growing and expanding into new sectors and new regions, while its advertising revenues are benefiting from the services it provides to third-party sellers. This is an area of Amazon’s business which JGGI’s managers believe is underestimated by some investors. In addition, Amazon’s public cloud business is also compelling, providing companies with cost savings and lower emissions. The managers view Amazon’s earnings power as ‘unrivalled’ due to its almost unlimited scope for further expansion.

Exhibit 3: Portfolio sector exposure vs MSCI AC World index (% unless stated)

Portfolio end-Mar 2022

Portfolio end-Mar 2021

Change (pp)

Index weight

Active weight vs index (pp)

Trust weight/
index weight (x)

Pharma & medtech

10.8

10.1

0.7

9.7

1.1

1.1

Media

10.3

11.1

(0.8)

9.1

1.2

1.1

Tech - semi & hardware

10.2

11.8

(1.6)

12.3

(2.1)

0.8

Banks

10.2

8.9

1.3

8.6

1.6

1.2

Industrial cyclicals

8.1

9.8

(1.7)

6.8

1.3

1.2

Retail

6.4

5.4

1.0

5.3

1.1

1.2

Technology - Software

6.3

4.3

2.0

7.7

(1.4)

0.8

Consumer Cyclical & Services

4.5

4.4

N/A

2.2

2.3

2.0

Automobiles & Auto Parts

4.1

5.2

N/A

3.3

0.8

1.2

Energy

3.6

0.0

3.6

4.4

(0.8)

0.8

Others

19.6

25.8

(6.2)

30.6

(11.0)

0.6

Cash

5.9

3.2

2.7

0.0

5.9

N/A

100.0

100.0

100.0

Source: JPMorgan Global Growth & Income, Edison Investment Research

At the sector level, technology – both hardware and software sectors – is the portfolio’s most significant underweight (Exhibit 3) as the managers view these sectors as generally overvalued, and vulnerable to valuation corrections as interest rates rise. Conversely, the managers’ ongoing efforts to lean into the recovery mean that the portfolio has significant overweights to consumer cyclicals and services, banks, industrial cyclicals, retail and automobiles.

Exhibit 4: Portfolio geographic exposure vs MSCI AC World Index (% unless stated)

Portfolio end-Mar 2022

Portfolio end-Mar 2021

Change (pp)

Index weight

Active weight
vs index (pp)

Trust weight/
index weight (x)

North America

67.8

64.9

2.9

61.4

6.4

1.1

Europe & ME ex-UK

20.9

24.5

(3.6)

12.1

8.8

1.7

Emerging markets

3.2

3.9

(0.7)

11.1

(7.9)

0.3

Japan

1.4

1.8

(0.4)

5.4

(4.0)

0.3

Pacific ex-Japan

0.8

0.0

0.8

3.1

(2.3)

0.3

United Kingdom

0.0

1.7

(1.7)

3.7

(3.7)

0.0

Canada

0.0

0.0

0.0

3.2

-3.2

0.0

Cash

5.9

3.2

2.7

0.0

5.9

N/A

100.0

100.0

100.0

Source: JPMorgan Global Growth & Income, Edison Investment Research

In terms of JGGI’s geographical positioning, the portfolio’s heaviest overweight is to Europe ex-UK, (Exhibit 4), where the managers believe companies, particularly European banks, are attractively valued relative to the US and other markets, especially after the recent sell-off (see Exhibit 1, right-hand side). The trust also has a lesser overweight to the US. Its largest underweight is to emerging markets, where the managers remain ‘very cautious’. The portfolio no longer has any direct exposure to China, as the managers have sold positions in Chinese names including Alibaba, an internet retailer and Tencent, an internet content and information company, due to increasing concerns about the Chinese government’s regulatory crackdown and the market’s mounting scepticism about the government’s commitment to growth. This lack of exposure ensured that the portfolio avoided the pain of the recent sell-off in the Chinese market.

JGGI also has no direct exposure to Russian or Ukrainian listed companies, and less than 1% of portfolio revenue is derived from these markets. The managers recently opened a position in Carlsberg, a well-run Danish brewing company, which is Russia’s largest brewer. Carlsberg’s shares sold off sharply following the Russian invasion, but JGGI’s managers believed this sell-off was excessive, as they expect the economic impact of the war to be manageable for Carlsberg. The company has since announced its withdrawal from the Russian market, and the share price has made a partial recovery.

The trust’s managers are keen to stress that the underweight to emerging markets is not as significant as it appears, as many portfolio holdings, especially in Europe, have significant exposure to China and other emerging markets. For example, they have recently increased a position in LVMH, a French luxury goods manufacturer, when the stock sold off to attractive levels. This company has a significant exposure to Chinese consumer demand and is now a top four holding. The managers cite their holding in Schneider Electric as another example of this indirect exposure to emerging markets. They believe this company is the ‘best sustainable company in the world’, thanks in large part to its contribution to the development and management of EV charging grids, and they expect the company to double its global earnings over the next five years.

JGGI’s portfolio remains relatively concentrated, with the top 10 holdings representing almost 30% of the portfolio at end March 2022. Portfolio turnover at end March was 71%, within the trust’s usual 60–80% range, with most transactions relating to the management of the position sizes of existing holdings, according to the managers.

In all, Woodhouse and his colleagues believe they have a well-balanced portfolio focused on quality companies spread across a variety of sectors and regions, with exposure to both the ongoing recovery and to long-term structural trends. In addition, they are confident that JPMorgan’s research resources will continue to identify other exciting and attractive investment opportunities from the broad global opportunity set, making them ideally positioned to build on the trust’s short- and longer-term success.

Performance: Stock selection is driving strong returns

Exhibit 5: Five-year discrete performance data

12 months ending

Share price (%)

NAV (%)

MSCI AC World (%)

MSCI World (%)

CBOE UK All Cos (%)

31/03/18

9.2

(1.6)

2.9

1.8

1.2

31/03/19

5.1

9.3

11.1

12.6

6.2

31/03/20

(3.0)

(7.3)

(6.2)

(5.3)

(19.1)

31/03/21

47.6

50.9

39.6

39.1

26.6

31/03/22

18.7

17.6

12.9

15.9

13.2

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

Despite recent market volatility, in the six months to end March 2022, JGGI returned 8.1% on a NAV basis and 6.9% in share price terms, compared to a benchmark return of 3.6%. The trust has also outperformed over the longer term. On a NAV basis, JGGI has outpaced its benchmark, the MSCI AC World Index, over one, three, five and 10 years to end March 2022 (Exhibit 6, right-hand side). The trust has made an average annualised return of 14.9% in NAV terms and 13.7% in share price terms over the past 10 years to end March 2022, compared to a benchmark return of 12.7% over the same period (Exhibit 6, right-hand side). The trust has also outperformed the UK market, as represented here by the CBOE UK All Companies Index, even more decisively over all periods, as shown in Exhibit 7, while Exhibit 8 shows that JGGI has outperformed all its peers in the AIC Global Equity sector over all periods shown beyond one year.

Superior stock selection has been key to JGGI’s strong performance record, usually generating around two-thirds of returns, across most sectors. Asset allocation decisions account for most of the remaining third of outperformance, while regional allocation decisions usually have a negligible impact. At the stock level, recent performance has been enhanced by JGGI’s holdings of both companies benefiting from long-term structural shifts and quality cyclical stocks that have been supported by the economic reopening and recovery.

One of the main contributors to returns over the year to end February 2022 was the portfolio’s overweight position in Alphabet, the parent of Google, the internet content and information company. This holding has been one of the principal beneficiaries of the pandemic, thanks to revenues from online advertising and continued rapid growth in Google’s cloud platform, as business demand for data storage and processing increases. The managers continue to hold this stock as they believe it is well-placed for further long-term structural growth as these trends continue to run far beyond the trust’s investment horizon. Microsoft, the US software infrastructure company and JGGI’s second largest position, was another significant contributor thanks to strong, pandemic-induced demand for its products. Other long-term holdings in tech companies, especially semiconductor manufacturers, performed well as they profited from rising demand from the automotive and industrial sectors.

Another tech-related business, Prologis, a US industrial REIT, also enhanced performance. This company focuses on distribution warehouses for ecommerce companies, whose businesses have seen accelerated demand since the onset of the pandemic. Prologis’s rents have risen 20% in the past year and, while the position has recently been trimmed, the trust still owns the name, as the managers expect the company’s recent development activity to support further robust growth in 2022 and beyond.

The managers’ rotation into companies geared to the reopening of global economies has also helped performance, with contributions coming from McDonald’s, Marriott and Booking.com.

Exhibit 6: Investment trust performance to 31 March 2022

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 7: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to MSCI AC World

2.8

5.2

4.3

5.2

15.0

15.5

20.8

NAV relative to MSCI AC World

(0.9)

4.0

3.2

4.2

11.3

4.8

9.1

Price relative to MSCI World

2.2

4.9

3.0

2.4

11.3

11.4

11.2

NAV relative to MSCI World

(1.5)

3.8

1.9

1.5

7.8

1.1

0.5

Price relative to CBOE UK All Companies

5.7

1.4

2.9

4.9

46.5

56.4

100.7

NAV relative to CBOE UK All Companies

1.9

0.3

1.8

3.9

41.9

41.9

81.3

Source: Refinitiv, Edison Investment Research. Note: Data to end-March 2022. Geometric calculation.

Recent and prospective rises in interest rates have helped the trust’s overweight to banks. One notable contributor to returns has been the US bank Wells Fargo, whose new management team is rationalising its operations. Energy supply concerns triggered by the war in Ukraine have benefited JGGI’s exposure to ConocoPhillips, a US oil and gas producer.

Pharmaceutical companies have also made a meaningful contribution to performance over the past year. The managers seek out innovative healthcare companies providing solutions to major health challenges, such as diabetes and obesity. For example, the trust has a position in Novo Nordisk, a Danish pharmaceutical company that has developed new treatments for both these diseases. Its diabetes treatment semaglutide and its anti-obesity drug Wegovy have both been approved recently and are expected to generate very strong demand. The stock has performed very strongly, enhancing the trust’s returns. Other recent healthcare contributors include Boston Scientific, a US medical devices company, which added to performance as routine operations resumed, and Bristol Myers Squibb, a US drug manufacturer whose valuation has improved as concerns about the loss of exclusivity on several of its major drugs have diminished.

The positive performance impact of these stocks was only partly offset by the adverse impact of some other positions. Not holding Tesla, the US electric vehicle manufacturer, or Apple, the consumer electronics giant, detracted from performance over the past year, given their extraordinarily strong returns over the period, but the managers view them, and other expensive, high-growth stocks, as vulnerable to significant downward revaluations as interest rates rise. In fact, this caution has served the portfolio well elsewhere. During the first months of 2022, avoiding other high-growth stocks, especially software names such as Salesforce and Paypal, has supported performance.

Overweights to Adidas and Volvo also detracted. However, the managers have taken the opportunity created by Adidas’s protracted sell-off to add to this position, as they like the company’s business model and view recent Asian supply chain issues as temporary. They believe the company has great prospects for growth and profit over the next 10 years. Volvo Trucks has been subject to similar issues. The managers believe it is ‘the best truck company in the world’, with favourable long-term growth prospects, but it has been dogged recently by shortages in semiconductors. As with Adidas, they believe this supply problem is presently at its worst and will prove short-lived, and they have recently added to this holding.

Peer group comparison

JGGI became a member of the AIC’s Global Equity sector in FY17 when it adopted its higher distribution policy. All the funds in this sector invest globally and pay dividends, but their investment approaches differ significantly. For instance, Murray International (MYI) has a strong bias towards emerging markets, while Henderson International Income (HINT) specifically excludes investment in the UK. JGGI is presently the third largest among its peers but its forthcoming merger with SCIN will lift its ranking to second place.

The trust’s strong performance over both the short and long term has ensured that on a NAV total return basis it now ranks third over one year, and first over three, five and 10 years (Exhibit 8). This compares with a second-place ranking for all periods in September 2020. It has the lowest ongoing charge in the sector, and the merger with SCIN is expected to reduce the charge even further, which will make it even more competitively priced. Like its peers, JGGI no longer pays a performance fee, as this arrangement ceased from 1 January 2022 (see Fees and charges section below). The trust’s premium compares with an average discount of 1.6% within the peer group, while its gearing is lower than average. JGGI’s prospective dividend yield of 3.8% ranks third among its peers, although it is the only trust in the sector to target a specific level of dividend yield (of at least 4% of NAV per share at the end of the previous financial year) that may be partially funded out of capital. Its peers primarily pay dividends out of portfolio income.

Exhibit 8: Selected peer group at 27 April 2022*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing
charge

Perf.
fee

Discount
(cum-fair)

Net
gearing

Dividend
yield

JPMorgan Global Growth & Income

737.4

17.6

64.5

76.9

261.7

0.5

No

3.5

100

3.8

Henderson International Income

344.9

11.8

30.7

42.4

175.9

0.8

No

(4.0)

111

4.1

Invesco Select Glo Eq Inc

56.8

14.1

37.9

49.8

201.9

0.8

No

(5.5)

111

3.1

Murray International

1,529.1

17.9

31.9

35.8

119.8

0.6

No

(3.9)

113

4.5

Scottish American

880.4

14.8

48.8

76.4

222.3

0.6

No

1.5

112

2.5

Securities Trust of Scotland

232.0

17.7

38.9

51.9

170.4

0.9

No

(1.3)

109

2.4

Simple average (six funds)

630.1

15.6

42.1

55.5

192.0

0.7

(1.6)

109

3.4

JGGI rank in peer group

3

3

1

1

1

1

1

6

3

Source: Morningstar, Edison Investment Research. Note: *Performance as at 26 April 2022 based on ex-par NAV. TR = total return. TER = total expense ratio. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Dividends

JGGI’s dividend policy pays a dividend of at least 4% of NAV at the end of the previous financial year. The dividend is paid in four equal instalments in October, January, April and July and can be part-funded from capital and revenue reserves. The dividend has grown in absolute terms each year since the higher distribution policy took effect in FY17 (see Exhibit 9).

The board views the option to part-fund dividends from reserves as a way of meeting investors’ desire for income and clarity over dividend payments for the coming year, while still pursuing JGGI’s growth-oriented investment strategy, as it means that the trust’s managers are not constrained by the need to invest in high dividend-paying companies. This leaves them free to invest in non-dividend paying companies, to benefit from their capital growth. JGGI’s move from trading at a discount to NAV, to trading at a small premium since the introduction of the new distribution policy appears to confirm investors’ satisfaction with this approach.

The trust experienced some dividend cuts during FY20 due to the impact of the pandemic, but this did not affect dividend distribution for FY20 or FY21, and it is not expected to effect FY22 dividends either. On the contrary, in FY21, the trust paid a dividend of 13.16p per share, up from 13.04p in FY20 and on 1 July 2021, the board declared an FY22 dividend of 16.96p, an increase of 29% on the previous year, which reflects the strength of performance during FY21. This equates to a prospective yield of 3.8% at the current share price.

Exhibit 9: Dividend history since FY15

Source: JPMorgan Global Growth & Income, Edison Investment Research

The FY21 dividend of 13.16p per share was mainly funded from reserves and the FY22 payment will also draw partially on reserves, but to a lesser extent, thanks in part to the resumption of dividend payments by European banks. However, JGGI’s reserves are substantial. As at end December 2021, the trust had no revenue reserve, but the capital reserve stood at £574.5m, up 9.2% from £526.2m at the end of June 2021 – sufficient to fund years of dividend payments if required, even without any additional capital growth.

Premium: Small premium persists

Aside from a sharp and short-lived foray into discount territory in March 2020, at the start of the coronavirus crisis, JGGI’s share price has traded at a premium to cum-income NAV for most of the time since it adopted its higher distribution policy at the start of FY17 (Exhibit 10). JGGI’s shares are presently trading at a premium of 3.5%, within a well-established range around a premium of 3%, compared to an average discount of 2.8% over the past 10 years. As discussed above, this significant re-rating attests to the popularity of the new dividend policy with investors and has seen the trust re-issue more than 30m shares from treasury since the introduction of the higher dividend policy (Exhibit 11). The trust’s strong absolute and relative performance has further supported the share price. The board also has scope to issue shares to manage the premium and repurchase shares with the aim of maintaining a maximum average discount of around 5%.

Exhibit 10: Discount over five years

Exhibit 11: Buybacks and issuance

Source: Refinitiv, Edison Investment Research

Source: Morningstar, Edison Investment Research

Exhibit 10: Discount over five years

Source: Refinitiv, Edison Investment Research

Exhibit 11: Buybacks and issuance

Source: Morningstar, Edison Investment Research

Fund profile: Attractive income, and merger pending

JGGI was launched in 1887 and is listed on the London and New Zealand stock exchanges. It changed its name from JPMorgan Overseas in July 2016 at the same time as it adopted a higher distribution policy. This policy aims to pay a dividend of at least 4% of the previous year-end NAV, announced at the start of the financial year and paid in four quarterly instalments. This gives investors certainty over their dividends for the coming year. The new distribution policy has been welcomed by investors and the trust has re-rated significantly, from a discount to NAV to a small premium. As a result, this policy has been adopted by a number of other investment trusts managed by JPMorgan Asset Management (JPMAM) and, in February 2020, JGGI changed its ticker from JPGI to enable investors to recognise it more readily as part of this suite of products, which also includes JCGI (China Growth and Income) and JAGI (Asian Growth and Income).

In October 2021, JGGI’s board announced that it had signed heads of terms with the board of SCIN in respect of a proposed combination. The announcement follows a review of SCIN’s investment management arrangements undertaken by its board after a period of underperformance. SCIN’s board selected JGGI because of its style-agnostic investment strategy and performance track record. Once the transaction is completed, JGGI’s assets will total at least £1.3bn. Its dividend policy and investment strategy will remain unchanged after the merger.

On 21 January 2022, SCIN confirmed that JPMorgan Funds had assumed the role of SCIN’s alternative investment fund manager (AIFM) and had delegated portfolio management responsibilities to JPMorgan Asset Management (UK). Since then the portfolio has been managed in line with JGGI’s investment strategy, which was approved by SCIN’s shareholders at the General Meeting held in December 2021.

At the end of March 2022, SCIN announced that it had completed the buy-in of the benefits under its pension scheme with a third-party insurer, and it also expects the sale of its property at 6 Albyn Place, Edinburgh to be agreed in the near future. However, the merger with JGGI is now expected to complete in Q222 rather than at the end of Q122, as originally foreshadowed, as negotiations with SCIN’s debt holders are still underway. An update will be provided in due course.

The merger would unify two of the oldest investment trusts in the sector – SCIN was incorporated in 1887, the same year as JGGI. If approved, following the completion of the transaction, JGGI intends to hold its AGMs in London and Edinburgh on alternate years, ‘to reflect both the English and Scottish heritage of the combined entity’.

Investment process: A focus on structural change

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 has been consistent since its adoption in September 2008 under the previous manager, Jeroen Huysinga, who retired in early 2019. The trust is now managed by Helge Skibeli, Rajesh Tanna and Tim Woodhouse, who was previously co-manager with Huysinga. Between them, the managers have more than 50 years’ tenure at JPMAM. They are supported by a team of 97 experienced sector specialist analysts, who undertake intensive research into c 2,500 developed and emerging 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 Asian demand for goods and financial services. Research of this kind generates unconstrained, uncorrelated ideas which underpin 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 and NextEra Energy (a world leader in solar and wind power generation) and LVMH (a global luxury goods producers with a large market in Asia).

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. Secondly, 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 70 ‘best ideas’ holdings.

At the AGM held in October 2021, shareholders agreed a change in the trust’s investment guidelines to allow an increase in the maximum aggregate of the trust’s top 10 holdings and top 20 holdings to 45% and 65% of total asses respectively, from 35% and 55% previously. This change is intended to provide the managers with increased flexibility to manage the portfolio. The new guidelines came into effect on 27 October 2021.

JGGI adopts a passive currency hedging strategy that aims to make stock selection the predominant driver of overall portfolio performance relative to the benchmark. This strategy is a risk reduction measure intended to eliminate most of the differences between the portfolio’s currency exposure and that of the benchmark. As a result, the portfolio’s exposure to currencies, and the returns derived from this exposure, may differ materially from those of the trust’s competitors, which generally do not undertake such a strategy.

JGGI’s approach to ESG

JPMAM has over 20 years’ experience of corporate engagement and governance oversight, and environmental, social and governance (ESG) factors inform and influence JGGI’s longer-term forecasting. A dedicated team of ESG analysts applies a proprietary ESG checklist to each company it covers. Consideration is given to many issues including how each company addresses climate change, pollution, labour relations and diversity issues. In environmentally sensitive sectors such as energy, the managers also consider the sustainability of businesses. The quality of a company’s corporate governance and management incentive structures is another consideration. In all these areas, JGGI’s managers are looking for companies that may not necessarily have perfect historical ESG records but are making efforts to improve their credentials. For example, Woodhouse and his colleagues did not own Wells Fargo for several years due to its involvement in a mis-selling scandal, but they are now comfortable buying this company due to the new management team’s efforts to improve the company culture. JPMAM maintains a constant dialogue with companies held in all portfolios, with the intention of holding them to account on their ESG commitments, as on other key elements of corporate strategy.

Recent ESG engagements include a meeting with RWE, a German utility company, which provided the trust’s managers with more information about RWE’s major push into renewables and its plans to divest its coal-fuelled assets. A meeting with the new CEO of NextEra Energy provided useful insights into this company’s plans to expand its solar and onshore wind power generation plants, in response to recent energy price increases.

Gearing: Used tactically to enhance returns

JGGI has a gearing range between 5% net cash and 20% geared in normal market conditions. At the onset of the pandemic, the trust had no gearing due to the managers’ concerns about excessive valuations. They began gradually increasing gearing during the summer and autumn of 2020, as market conditions stabilised and opportunities began to emerge. Gearing peaked at around 6.0% in March 2021 and managers subsequently reduced the level of gearing to zero, due to concerns that valuations were once again looking too high after equity markets’ exceptional gains since the start of the COVID crisis. However, the recent market sell-off, combined with the managers’ relatively positive view on the outlook for global markets, has led them to increase gearing slightly to around 0.8%.

The managers say they are ‘biding their time’ on the further redeployment of gearing as they await more clarity on the inflation and interest rate outlook, but it is clear that they are willing to increase gearing if they see additional compelling opportunities.

JGGI is geared via £50m of borrowings. It has £30m of 30-year unsecured fixed-rate loan notes, issued in 2018, which pay an annualised coupon of 2.93% and mature in 2048, and in March 2021, the trust issued an additional £20m in fixed-rate, 15-year unsecured notes at an annualised coupon of 2.36%. The board agreed to issue the new notes to allow the managers to take advantage of current funding conditions, which they believe offer long-term borrowing at an attractive level. The notes are unsecured, giving the managers increased flexibility to manage future borrowings.

Fees and charges

JGGI’s Alternative Investment Fund Manager (AIFM) under the AIFM Directive is JP Morgan Funds, and this arrangement will remain in place following the forthcoming merger with SCIN. Prior to 1 January 2022, JP Morgan Funds received an annual management fee of 0.4% of gross assets and the trust was also liable to pay a performance fee totalling 15% of outperformance to the AIFM if the NAV total return is more than 0.5pp ahead of the benchmark in any financial year. A performance fee of £1.6m was payable for the year ended 30 June 2021 (£0.3m for 2020). This performance fee is paid out over the four subsequent years and may be written back in the event of future underperformance. There is an accrual of £6.0m included in the financial statements in respect of performance fees that could become payable in future years.

However, as part of the merger with SCIN, JGGI’s board has agreed a revised management and performance fee arrangement, to replace the existing fee structure with a tiered management fee. From 1 January 2022, the trust will pay a fee of 0.55% on net assets up to £750m, 0.40% on net assets between £750m and £1.5bn and 0.30% on net assets above £1.5bn. This represents an increase on the flat, 0.40% fee paid prior to 1 January 2022. However, no performance fee will be paid from this date, although any performance fee accrued up until then will be paid in full. JP Morgan Funds has agreed to make a contribution to the costs of the forthcoming merger with SCIN equivalent to eight months of the management fee payable by the enlarged vehicle.

JGGI’s ongoing charges are currently 0.53% (as at 28 February 2022), one of the lowest in its AIC peer group, as discussed above. This is unchanged from the ongoing charge for the financial year ended 30 June 2021 (0.55% for 2020). Including the performance fee, the total charge for FY21 was 1.59% (0.60% in 2020). However, the merger with SCIN is expected to lower the ongoing charge by 11 basis points, making it even more competitive, especially given the removal of the performance fee.

Capital structure

JGGI is a conventional investment trust with one share class. The board has scope to allot up to 10% of shares each year to manage the premium to NAV, and regularly makes small issuances. During FY20, 8.5m shares were allotted and a further 9.8m shares were allotted in FY21, taking shares in issue to 154.9m at the end of the last financial year. So far in FY22, a further 6.8m new shares have been allotted and shares in issue currently total 163.6m. No shares are held in treasury. The board can also buy back up to 14.99% of shares annually to manage a discount to NAV. However, no shares have been repurchased in recent years. Once the pending merger with SCIN is completed, SCIN’s shareholders will receive new ordinary shares in JGGI.

The board

Exhibit 12: JPMorgan Global Growth & Income’s board of directors

Board member

Date of appointment

Fee in FY22

Shareholdings at end-FY21

Tristran Hillgarth, chairman

November 2014

£43,500

60,000

Gay Collins

February 2012

£32,000

17,592

Sarah Whitney (audit committee chair)

January 2020

£36,000

Nil

James Macpherson

April 2021

£32,000

Nil

Source: JPMorgan Global Growth & Income.

As previously announced, Nigel Wightman retired as chairman at the end of the AGM in October this year. He was replaced as chairman by Tristan Hillgarth. James Macpherson joined the board on 1 April 2021.

On completion of the transaction with SCIN, JGGI’s board will have representation from both JGGI and SCIN. Details will be announced in due course.


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This report has been commissioned by JPMorgan Global Growth & Income and prepared and issued by Edison, in consideration of a fee payable by JPMorgan Global Growth & Income. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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