JPMorgan Asia Growth & Income (JAGI) offers a combination of a growth-oriented total-return approach and a substantial dividend of 1% of NAV per quarter, paid largely from capital. JAGI was renamed in February of this year, having been known previously as JPMorgan Asian.
In NAV total-return terms JAGI is the top-performing Asian income trust over five years, (see Performance section). Its success is built on the bottom-up research of a team of almost 40 analysts based across Asia; an investment process designed to ensure stock selection rather than country allocation is the most material influence on relative returns.
The process is unchanged since the 2017 board decision to pay 1% of NAV in a dividend each quarter. This continuity means that the quality growth characteristics of the portfolio have not changed, and it remains heavily exposed to secular growth in the consumer, technology and financial spheres. This means JAGI offers a substantial dividend from a portfolio with very untypical exposures for an income fund. It therefore offers diversification to income investors but also greater total-return potential, if current trends for the outperformance of growth versus value and tech versus everything continue.
Following the emergence of the pandemic it has been essentially business as usual for the managers, who haven’t made radical changes to their positioning. The quality of the portfolio has increased slightly as they take advantage of cheaper valuations on certain companies.
Since implementing the enhanced dividend policy in 2017, the discount has generally been in single digits having previously been much wider – it is now c. 0.4%.
This has been a difficult period for income investors, given the impact of the pandemic on the earnings companies use to pay their dividends and government restrictions on payouts following their support schemes for companies. JAGI’s ability to pay dividends out of capital means that it is not affected by these issues, or at least only indirectly through any fall in the share price of its holdings.
So far there has been only a modest impact to the March dividend, as is discussed in the Dividend section, with the June payout seeing a marked recovery. As the dividend is based on the quarter end NAV, market movements are critical. Areas of high growth such as technology and ecommerce have outperformed, and JAGI has substantial holdings there despite the fact that they offer low dividend yields. This choice of holdings reflects, what we think, is the key long-term attraction of the trust: its ability to offer access to high-growth sectors and companies whilst shareholders receive a significant dividend yield.
These considerations mean that we think the tight discount is justified. We would expect pressure on developed world dividends to continue, due to the uncertain outlook for the pandemic. In addition we would expect growth stocks to continue to perform strongly, due to low rates continuing for some time to come.
|A substantial dividend yield not dependent on portfolio income
||Due to investing for capital growth, might not provide the defensive qualities of a traditional income strategy
|Exposure to high-growth companies not often offered by income funds
||China is over a third of the benchmark, so investors take some single-country risk
|Strong and consistent track record of outperformance through stock selection
||Dividend will vary with movements in NAV
JPMorgan Asia Growth & Income (JAGI) is managed with a total-return approach by Ayaz Ebrahim, Robert Lloyd and Richard Titherington, senior members of JPMorgan’s Emerging Markets and Asia Pacific (EMAP) equities team. Their approach is resolutely bottom-up, based on fundamental analysis done by a huge team of 36 analysts based across Asia, with the aim of generating significant long-term outperformance of the MSCI AC Asia ex Japan benchmark.
The basic philosophy is to focus on identifying superior-quality growth stocks, trying to look out further than the market and holding on to stocks through economic and market volatility. The managers believe this approach is a more reliable way to generate outperformance, than trying to forecast the short-term course of national economies and tilting their exposures on that basis. The table of top ten holdings (below) illustrates how the focus on finding companies which can generate superior growth rates sustainably into the future has led to major positions in those serving secular trends. These trends are of consumption growth, technological advancement and demand for sophisticated financial products. The managers believe that all of these trends remain active despite the short-term impact of the pandemic. Over half the portfolio is in the top ten holdings, meaning that the portfolio is, in our view, relatively concentrated when compared to 35% in the MSCI AC Asia ex Japan benchmark. The investment process is designed to ensure that stock selection is more likely to drive returns than country or sector allocation.
JAGI: TOP TEN HOLDINGS
|Shenzhou International Group
|Ping An Insurance
|China Resources Land
|Hong Kong Exchanges and Clearing
Source: JPMAM, as at 31/08/20
The highly volatile markets we have seen during the pandemic are a challenge to a concentrated, long-term approach, but the turnover in the portfolio this year has actually been low by historic standards as the managers stick by their tried and tested approach which has seen them outperform all other Asia income closed-ended funds in NAV total return terms over the past five years (see Performance section). This year the portfolio has benefitted from significant exposure to information technology and ecommerce companies which have been seen as winners from the crisis (such as the three largest positions above), but has suffered from another longstanding position in Indian financials as that country’s economy has been hard hit by the pandemic. However, although some exposure to Indian financials has been trimmed, the managers have not made major changes as their time horizon for investments is long and they do not think the long-term prospects for many of their holdings, including Indian financials, has been sufficiently damaged.
The analysts work within the same framework no matter what industry they cover, meaning that companies in the same sector can be compared across the region; in a globalised economy, we believe this is increasingly the most relevant way to consider stocks. They build a five-year expected return for each company based on earnings growth, dividends, changes in valuation and expected currency moves. Although the pandemic has had some major short-term effects, the analysts’ job is to look through this period out over five years of earnings. The volatility caused by the pandemic has thrown doubt on some near-term earnings, but it has also impacted expected valuation moves which has, in some cases, had an offsetting effect. It is also worth highlighting that because of the long timeframe for analysis, high current year or next year valuations can still be justified if expected earnings growth and dividends are high. The managers are therefore happy to hold on to the likes of Tencent and Alibaba despite high valuations, as they think the huge growth potential in new lines of business can more than make up for any regression of valuation to a longer-term average multiple. Therefore the portfolio as a whole therefore looks more expensive than the market, but with a higher return on equity. The five-year expected growth in earnings is in line with the market, but the analysts tend to focus on the three to five year ahead period, believing they can get an edge by looking out through the immediate environments.
|12 month Forward Price to Earnings (x)
|Price-to-Book Ratio (x)
|Dividend Yield (%)
|Return on Equity (%)
|Five year expected growth (%)
|Number of issuers
|Net debt to equity (%)
Source: JPMAM, as at 31/08/20
The process is designed to ensure stock selection drives returns rather than country or sector allocation. Active country weights are generally therefore modest, as the current allocation in the below chart exemplifies. Although the portfolio is underweight China and generally has been so in recent years, the specific stocks picked in this country have been major contributors to performance, outweighing any effect of the allocation to or away from China.
Active sector weights have tended to be larger. However, thanks to the reduction in financials (particularly in India) following the emergence of the pandemic, the large overweight in financials has closed somewhat. Financials, technology and consumer sectors have been the sources of many secular growth stories which the analysts have identified in recent years, but allocations are driven by the stock-specific opportunities are, rather than a decision to be overweight to the sector per se. The high weighting to technology and consumer discretionary is a particular differentiator from the typical UK or global equity income fund, which is made possible by the policy of paying dividends from capital (see Dividend section).
Analysts are allocated mostly to a sector and are asked to identify the superior companies in that industry on three metrics: economics, duration and governance. Economics refers to the ability of a company to generate superior earnings and cash generation, whereas duration refers to a company’s ability to do so persistently into the future, and governance aims to isolate the risks to shareholder value from poor corporate governance.
Having considered these three areas, the analysts allocate a stock to one of three silos: ‘premium’, ‘quality’ or ‘trading’. Premium companies are considered to have high-quality earnings and governance, with the ability to maintain their advantages long into the future. Quality companies are those which might have strong growth prospects but less defensible positions, so their superior growth is less likely to be long-term. Trading companies are generally of poorer quality, but might be considered for a shorter-term investment if valuations or cyclical conditions become attractive. JAGI’s portfolio is expected to be mostly invested in premium and quality stocks, with a smaller allocation to shorter-term trading opportunities. When the crisis struck in early 2020 and the market sold off in its entirety, the managers increased their weighting to premium and quality companies, at the expense of trading names, as they were on more attractive valuations in their opinion.
Although bottom-up analysis on companies is the critical input into buy and sell decisions, the EMAP team also have four dedicated macro and quant analysts who run multi-factor models on the individual economies in the region and rank them in terms of attractiveness. This rating is then used to guide geographical allocation in a limited way, mainly with regards to the smallest bucket in the portfolio, ‘trading’, as well as to help understand earnings growth potential. In fact, given that the expected holding period for premium and quality stocks is five years, the models are generally too short-term to apply.
The team’s macro valuation models also come into play when considering the gearing, and are the major reason why the trust has not been geared since the start of 2017. This is only expected to change when the models show significant value across the market, which is likely to happen after a major sell-off or turning of the cycle. As of the end of August the team believe that valuations are attractive on a market level, and earnings may be bottoming out. However, on the negative side, there is still considerable uncertainty about the course of business and economic cycles, which means the team are not taking on gearing.
JAGI’s board has given the manager discretion to borrow up to 20% of NAV, and it has facilities in place to do this. However the trust is not geared at the moment, and hasn’t been since the start of 2017. This is because the managers use valuation signals from their macro models to decide when to gear, but since the rally in 2016 these models have not indicated extreme levels of undervaluation. The team believe it is prudent to be cautious with gearing, given the volatile nature of Asian markets currently. Notably over five years the trust has outperformed its benchmark and every peer in the Asia Pacific and Asia Pacific income sectors, despite having low or no gearing through the period. The three peers in the Asia Pacific income sector have all had modest structural gearing through much of this time, as have a number of those in the Asia Pacific sector.
JAGI has an outstanding long-term track record from a NAV total return point of view. On a NAV TR basis it has outperformed a passive investment in its benchmark (represented by the iShares MSCI AC Asia ex Japan ETF), in each of the past seven complete calendar years – although in 2020 year to date it is behind. Impressively, the trust outperformed in the sharp rally of 2017, as well as in the last two down years of 2015 and 2018. The below chart also considers the Morningstar Asia Pacific Income sector, although the dividend policy which qualifies JAGI for the sector was not implemented until 2017. Given the other trusts in that sector deliver a natural yield, they have been less focussed on high-growth areas and have therefore lagged JAGI since that year.
Over the five years to September 17th this year, JAGI has substantially outperformed not only the ETF tracking its benchmark, but the average Asia Pacific income trust in NAV total-return terms. In fact, looking across the income trust sector for the Asia Pacific region, JAGI is by some way the best performer, with NAV total returns of 124%. The second-best performer has made just 73%. Passive investors in the ETF have experienced total returns of just 88% over this period.
The investment process is designed to ensure stock selection is the overwhelming contributor to this outperformance, rather than sector or country allocation. In fact, on a country basis, stock selection was responsible for 28.2 percentage points of the outperformance over the five years to 31 December 2019 out of a total 32.4 percentage points (according to JPMorgan figures). In 2020, although the trust has slightly underperformed in NAV total return terms, it has continued to be stock selection which has determined results. To the end of August, country positioning added 74bps and stock selection detracted 155bps.
This has been, in part, due to the poor performance of Indian financials. The team are believers in the long-term growth story in certain Indian private sector banks. These banks benefit from a growing population which, thanks to economic growth, is increasingly demanding financial products like bank accounts, mortgages and business loans. They also benefit from weak state-owned incumbents. However India has been hard hit by the pandemic, and this has impacted the economically sensitive financial sector. The Indian economy was also weak heading into the crisis, due to the impact of a crisis in the weaker banks. As they expect India and its banks to struggle for some time to come because of the pandemic, the managers have reduced their weighting to these positions although they have not sold out completely.
Banks have suffered across the region, as they have been ordered or requested by governments to conduct moratoriums on loans, lend to favoured clients and otherwise absorb losses in the national interest. However the team view this as a cyclical development, not a secular change, and have not reacted much to the volatility we have seen during the crisis. In fact the managers tell us turnover has been lower than usual in 2020 year-to-date, with an annualised rate of just 26% compared to 50%-60% in the last two years – this is of market cap rather than companies. On the other hand the team have been guided by their expected returns framework to invest more in the laggards on cheaper valuations. Good examples are casino operator Galaxy and Yum China: the owner of the KFC franchise in China as well as other restaurant chains. Over the last twelve months JAGI has performed in line with the ETF, having lagged by about two percent in 2020.
ONE YEAR PERFORMANCE
After such a long period of outperformance for growth over value, and after such a strong period of relative performance for technology and ecommerce stocks investors might worry that this move has become overstretched. However the team’s expected returns framework indicates there are still excellent returns to be expected from investing in some of the technology giants in the years to come. For example, Tencent can still grow its earnings 22% a year from here on the EMAP team’s estimates. This justifies a large position in the company, even if they expect the valuation to drag on returns by around 6% per annum. In the healthcare space, WuXi Biologics has doubled in 2020, but the team estimate it can still generate 8% a year shareholder returns.
One of the key attractions of JAGI, aside from the consistency of historical outperformance, is its dividend yield. In 2017 the board took the decision to significantly increase the payout, and the board now aims to pay 1% of NAV each quarter as a dividend, paying out of capital when necessary. This policy means that JAGI is effectively immune from any reduction in dividends on portfolio companies arising from the pandemic, which we expect to increase the attractions for UK equity income investors. However, given the NAV moves over time, the actual level of dividend paid (in pence) is likely to vary from quarter to quarter, depending on the course of markets and the NAV on the last business day of the quarter. Asian markets’ relative strength through the crisis should support the payout in pounds and pence: although the March dividend was down from 4.1p to 3.5p a share, the June payout rose again to 4p. Annualising that 4p dividend would give a yield of 3.8% on the current share price, although the trailing yield is lower when the NAV and share price have risen over the period since the last distribution.
The ability to maintain a high payout is likely to be the crucial factor for investors this year, however over the longer term we note the portfolio is likely to offer significant diversification from the UK equity income trusts that are widely held by UK investors. For example, the FTSE 100 has less than 1% in information technology stocks, compared to the 21% of JAGI. JAGI is strongly exposed to the outperforming growth factor which looks likely to remain supported by low interest rates for some time to come. Typically growth stocks offer lower dividends, so equity income investors have to choose one or the other, but JAGI offers both, and the strong total return reported in the Performance section reflects this.
JAGI’s investment strategy is run by the Emerging Markets and Asia Pacific (EMAP) equities team at JPMorgan. Ayaz Ebrahim and Richard Titherington were joined as named managers by Robert Lloyd in August 2018. Richard, who heads the EMAP equities team, works together with Ayaz on the top-down analysis and asset allocation, while Ayaz manages the trust on a day-to-day basis and leads on the stock selection. Richard has been with JPMorgan for three decades, and Ayaz joined in 2015 from Amundi; the latter heads up the Asia Pacific asset-allocation committee. Robert, with 12 years’ experience with JPMorgan, has run Asian portfolios since 2014 and manages several Asian regional portfolios together with Ayaz. His addition bolsters the team’s resources, particularly in stock selection. For insights, the managers can call on both the analysts and the country-specialist portfolio managers within the EMAP team.
The foundation of the strategy is the idea generation carried out by the extensive analyst team. Stock analysis and ideas come from both sector specialists, who tend to focus on the large caps in their industries, and product analysts, who are focussed on small- to mid-cap companies by geographies. As discussed above, JPMorgan has made large efforts to expand its coverage within China: 12 members of the overall research platform are dedicated to covering the Greater China region. A Shanghai office, which has been operating under a Wholly Foreign Owned Enterprise licence since late 2016, is staffed with four analysts already with more potentially to come.
Following the introduction of the new dividend policy in the 2017 financial year, the discount has narrowed markedly. JAGI’s shares now trade on a 0.4% discount to NAV, compared to a 4.2% AIC Asia Pacific Income sector average. The discount volatility has also been relatively limited this year. Although there was a spike in the coronavirus crash of February/March, the shares were quick to rebound close to NAV again. We think this, and JAGI trading closer to par than the peer group average, reflects the powerful combination of a portfolio with high exposure to successful growth stocks whilst having a clearly defined dividend policy largely paid from capital; thereby generating a high total return and a significant dividend yield.
JAGI’s ongoing charges of 0.74% make it the cheapest of the four trusts in the AIC Asia Pacific Income sector. The charges are the lowest, despite the trust having lower net assets than the other three peers. This is aided by the low management fee of 0.6% of market cap. The percentage charged is the lowest in the sector, while it is the only management fee that is charged on market capitalisation rather than net assets, meaning that the fee is reduced when the trust is trading on a discount. We like this feature, as it incentivises the manager to close the discount through strong performance. There is no performance fee, and the KID RIY is 1.36% compared to a sector weighted average of 1.68% (although methodologies can vary).
ESG is fully integrated into the stock-selection process of the whole EMAP team through the risk assessment which is completed as part of the company research. Each analyst completes a 98-question checklist regarding the risks of investing in each company. Three-quarters of these questions are focussed on corporate governance or other ESG issues, including those regarding emissions, other environmental issues and labour relations. The managers believe that the answers to the ESG questions are a strong indication of the quality of a company, although they have no set rules on not investing in companies because of certain answers (i.e. they have no negative screens). However, an assessment of these risks is factored into any buy or sell decision, with a greater expected return required for a riskier stock. The managers also engage with portfolio companies on ESG matters to encourage better practices, and governance specialists regularly attend company meetings alongside investment analysts.
While we think the integration of ESG issues is likely to be appealing to investors who value such matters highly, we note that there is minimal reporting on the engagement the managers have with companies. This step might nevertheless make the trust more appealing to ESG-minded investors. We also note that while the concentration on higher-quality companies in the universe should mean the overall number of ‘red flags’ (or poor answers to the checklist questions) is low, there is no reporting on the specific areas of concern in stocks which do make it into the portfolio.