JPMorgan Global Growth & Income

JGGI offers a differentiated solution to global equity income investing…

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This is a non-independent marketing communication commissioned by JPMorgan Global Growth & Income . The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

JPMorgan Global Growth & Income

Summary

JPMorgan Global Growth & Income Trust has a diverse global portfolio which seeks to provide superior total returns, in excess of its benchmark the MSCI All Cap World Index. The team are able to leverage JPMorgan’s considerable bank of global equity analysts, looking to create a portfolio of the highest-quality companies which are chosen for their exposure to key structural trends (as discussed in detail in the Portfolio section).

Recently JGGI changed its Dividend policy to one which allows it to pay its dividend from capital. It now targets a payout of 4% of its NAV, valued at its financial year end. As a result, the trust has fewer practical restrictions on how it can invest, being able to purchase high-growth but low-income names that its global equity income peers are typically not invested in. This has led to it having a large overweight to the US versus its peers in the AIC Global Equity Income sector.

Performance has been strong versus its peers. JGGI delivered an 81.4% NAV total return over five years, exceeding the peer group average of 51% and marginally ahead of its benchmark’s 79.7%. We discuss this, and the trust’s strong COVID-19 bounce back, in the Performance section.

Seemingly as a result of the new dividend policy and the strong performance versus its peers, JGGI has largely traded at a premium since 2017. It has maintained this premium after the initial outbreak of the COVID-19 pandemic, whilst most of its peers have traded at a discount.

Kepler View

It is our belief that JGGI offers something refreshing within the global equity income space. The ability to pay its dividend through capital is the key for JGGI, freeing it from the more typical high-income names. Not only does this allow it to invest in higher-performing sectors, but it also makes the trust attractive for diversifying an income portfolio.

One of the few ways an income investor can invest in the US while generating competitive yields is through trusts, such as JGGI, which can be creative with their dividends. The sacrifice an investor must make for this is the absence of a guarantee of a progressive dividend. That having been said, we believe that the risk of a more volatile dividend stream is more than made up for by the superior total returns JGGI has demonstrated.

This is, we believe, reflected in JGGI’s current premium. While buying a trust at a premium may be off-putting for some investors, in this case it seems reasonable. This has certainly been the case during the COVID-19 pandemic, where the trust’s investment flexibility has allowed it to come out on top, and it is one of the few positive performers in its peer group. So long as JGGI’s investment process and dividend policy continue to offer advantages, we believe its premium will be justified.

bull bear
Ability to pay dividend out of capital allows for flexibility in investing Dividend growth cannot be guarenteed
Diversifies away from the more traditional equity income allocation Relatively short tenure of management team for the trust
Outperformance versus peers since the COVID-19 crash More highly rated portfolio may underperform peers in a possible post-COVID value rally

Portfolio

JPMorgan Global Growth & Income Trust (JGGI) seeks to achieve superior total returns from world stock markets. JGGI is run by Helge Skibeli, Rajesh Tanna and Timothy Woodhouse, who are in turn supported by JPMorgan’s substantial roster of 96 fundamental research analysts across the globe. This well-resourced management team invest in a portfolio of ‘best ideas’ across the world’s stock markets.

Despite being a global equity portfolio JGGI follows a predominantly bottom-up process, a process which can be split into two parts: research and portfolio management. The research stage is undertaken by the JPMorgan analyst teams and is more akin to traditional stock selection, following a largely three-stage process. The first stage involves assessment of the company’s industry framework, the structural headwinds and tailwinds, and the key issues it faces in the future. The second stage is a cash flow and earnings forecast over multiple differentiated time periods. The team believe that long-term earnings are driven by structural factors, not by cyclical exposures. The final stage is a cash flow-based valuation for the company. Once assigned a valuation the team rank companies against their other prospective investments, with the top quintile representing the most undervalued companies and the fifth the most expensive.

This framework is designed to be fully transferable to any company, regardless of sectoral exposure or locality. We believe an objective and transferable process is important for any investment strategy, as through such a process an investor can be more confident in the repeatability and consistency of the performance of a manager or management team. This is in our view most pertinent for a global equity strategy, given the sheer range of potential investments. The JGGI team use their framework to combine the insights of different analysts, comparing the insights of those analysts with local coverage of businesses such as regional banks, utilities and REITs with the insights of those who cover global companies such as commodities and semiconductors. Using the same frameworks should allow the outputs of two distinctly different analyses to be compared in a consistent manner. In their view, this ability to combine analyses of local and global coverage creates an information advantage and alpha opportunity for JGGI’s team.

While the research stage seeks to be comprehensive the process ultimately rests on stock idea curation by JGGI’s team, as well as on challenging the analysts’ assumptions and translating stock picks into a viable strategy. When selecting their holdings, the team will assign a classification to each stock: ‘premium’, ‘quality’, ‘trading’ or ‘structurally challenged’. ‘Premium’ represents the absolute highest grade of company, and ‘quality’ means exceptional companies that are not quite as fundamentally strong as premium ones. ‘Trading’ encompasses companies which the team find attractive but on which they may not have sufficient information to allow them to be assigned to ‘premium’ or ‘quality’, such as younger or recently listed companies. ‘Structurally challenged’ are companies that are believed to face meaningful issues that will be difficult to resolve, and which the management team avoid investing in. The classification is determined using their three pillars of analysis:

Economics – does the business create value for shareholders?
Duration – can its value creation be sustained?
Governance – how will governance impact shareholder value?

The portfolio management process is a balancing act between selecting the best ideas the analysts generate, utilising the JGGI team’s understanding of prevailing market themes and their long-term winners, and creating a balanced and diversified portfolio. While the conviction behind and valuation of a company are important to them, the JGGI team need to be confident that the company will be a long-term winner. With their horizon being around a decade, the team will often use their understanding of current microeconomic trends to decide. The current portfolio consists of 62 stocks, with the typical range being 50–70.

The team’s understanding of structural drivers has evolved to meet the demands of a post-COVID-19 world. Consumer preferences are one example, with the increasing numbers of employees working from home causing the acceleration of online alternatives, and an increase in consumer savings. A recent investment made around this trend is Booking.com, an online hotel-booking website, where COVID-19 provided the entry point the team needed. With the challenging market hotels face, the team believe there will be increased demand from hotels for booking websites as they try to remain competitive.

Other themes include changing corporate behaviours, be it a shift towards cloud services and digital transformation, or the increasing dominance of the strongest market participants. One example is the team’s purchase of Morgan Stanley, a global investment bank and asset manager. Typically the team do not have a favourable outlook for banks, but they see Morgan Stanley as capitalising on both the ‘strong getting stronger’ theme and that of changing consumer preferences. The team believe Morgan Stanley’s core investment banking business represents one of the strongest players in the space, with its trading, M&A and wealth management arms doing well. Morgan Stanley’s expanding wealth management business also supports the team’s long-term outlook for the company thanks to the company’s recent purchases of the online trading platform E*TRADE and the asset manager Eaton Vance. The team believe wealth management is a key growth area thanks to the rise in consumer saving.

COVID-19 hasn’t only created opportunities, it has also forced the team to rethink the outlook for prior investments. The team held Airbus going into the crisis but have sold out of this recently, as a result of their long-term outlook for commercial air travel deteriorating. They have, however, added to their holding in Safran, an aerospace engineering company. Despite the impact of COVID-19 they believe that Safran’s business model remains strong, especially given its substantial aftermarket business, and so they saw COVID-19 as an opportunity to buy in at a lower valuation. The difference in the team’s approach to these two companies demonstrates their balance between the conviction they or an analyst will have in a company, and the team’s understanding of long-term drivers (where their higher conviction in Safran kept it in the portfolio despite the sectoral headwinds).

The end portfolio for JGGI is distinctive from that of its peers, not just as a result of the investment process but also because of the team’s ability to fund the dividend from capital, as is covered in the Dividend section. This gives JGGI the flexibility to allocate to companies and sectors which are not typically associated with high-dividend yields and allows the team to focus on total returns as opposed to having to balance them with income generation. As a result the portfolio has active weights versus the benchmark MSCI All Cap World index in America and Europe with North America being an unusual overweight for a global equity income product, as the region’s companies are increasingly preferring share buybacks to dividends. JGGI benchmarks itself against the MSCI All Cap World Index, which has no inherent bias towards higher-dividend stocks but rather reflects global equity markets as a whole. As such, when comparing JGGI against its income-focussed peers its structural overweights are far clearer.

regional allocation


JGGI %
Benchmark %
Peer group %
North America
65.1
60.2
34.7
Latin America
0.7
1.0
2.5
United Kingdom
4.5
3.7
6.9
Europe Developed
20.3
12.5
22.4
Europe Emerging
0.0
0.5
0.5
Africa/Middle East
0.0
1.1
0.8
Japan
2.9
6.9
0.9
Australia
0.0
1.9
2.4
Asia Developed
3.7
4.4
10.3
Asia Emerging
3.8
7.4
4.8

Source: Morningstar

Note: the peer group data which we have calculated is a simple average of the AIC Global Equity Income sector excluding JGGI. Data will not sum to 100% as a result.

Most of the price ratios of JGGI are also in excess of those of the peer group, indicating that JGGI is more growth-focussed. This is somewhat expected, as the focus of JGGI is more commensurate with total return generation than the focus of its peers, which has allowed it to invest in the more expensive, low-dividend names which have been the drivers of global equity performance during the COVID-19 pandemic. Fundamentally though, the team don’t like the idea of growth versus value, looking instead for good companies with the strongest share price outperformance.

price ratios


JGGI Benchmark Peer Group
P/E Ratio 23.8 21.8 19.5
P/B Ratio 2.8 2.3 2.5
P/S Ratio 2.1 1.8 2.2

Source: Morningstar, as at 02/11/2020

JGGI offers diversification potential for an income investor. Its region, factor and style biases are distinct from those of its peers, meaning there should be little overlap between it and other income strategies.

Gearing

JGGI currently operates with c. 2.8% net gearing, below the average 4% gearing it has operated with over the last five years. Gearing is typically utilised in a tactical manner, with the managers able to employ gearing within a strategic range set by the board. The board’s policy is to limit gearing within the range of 5% net cash to 20% geared in normal market conditions. The tactical nature of gearing means it will be utilised in environments which the managers believe are conducive to positive market returns. Towards the end of 2019 the team took the gearing down close to 0%, conscious of high valuations and fear around a downturn in the business cycle. Given the ongoing pandemic the team were ultimately proved right, but not for the reasons they expected. As the impact of COVID-19 on global markets begins to wane, the team have cautiously increased gearing with their increasingly bullish views on the industrial and cyclical sectors. JGGI’s gearing is currently quite modest when compared to the peer group average of 11%.

gearing

Source: Morningstar

The trust also operates with an amount of structural gearing. In 2018, the board issued £30m of fixed rate 30-year unsecured notes at an annual coupon of 2.93%. These notes represent 6.3% of current net assets (£418m as at 02/11/2020). This represents low-cost gearing, against which the managers can hold cash to effectively de-gear the trust.

Returns

The NAV performance of JGGI has been strong over five years, with an NAV total return of 81.4% and share price returns of 102.2%. This beats both the Global Equity Income peer group NAV average of 51% and the benchmark (MSCI All Cap World Index) return of 79.7% over the same period (we use the iShares MSCI ACWI ETF as an investable proxy). JGGI also ranks as the second best-performing trust within the peer group over the period. It must be noted that JGGI moved from the AIC Global Equity sector to the AIC Global Equity Income sector as a result of a change in its dividend policy in 2017.

five-year performance

Source: Morningstar

As shown by the below chart of discrete returns, the trust’s NAV on average ha outperformed both its peer group and benchmark in a given year, failing to do so only twice in the last five years. The two periods which we believe are most important are 2016 and 2020. The nominal NAV return in 2016 of 33.4% is the highest return in any one year and is also the largest nominal outperformance versus its benchmark. These impressive returns likely played a large factor in the trust’s premium rating, as covered in the Discount section. 2020 is also of note because it represents an uncharacteristic outperformance of the benchmark during a down market (compared to 2018 and 2011). Additionally, YTD 2020 is also the period of greatest outperformance versus the peer group, so far having generated a 4.5% NAV return against the peer group’s -5.1%. This outperformance has been driven by the trust’s overweight to the US compared to its peers. As outlined in the Portfolio section, JGGI currently has a substantial overweight to the US versus its peers, and its US exposure contributed 9.5% to its year-to-date return (Source: JPMorgan, as at 30/09/2020).

calendar-year returns

Source: Morningstar, as at 02/11/2020

Given JGGI’s performance in 2020, one-year NAV performance has been strong, generating a 5.5% NAV total return, in line with the 5.7% of its benchmark and well in excess of the -2.4% of the peer group. The share price performance over this period has been even stronger than the NAV, returning 9% over one year. We believe that there has been a momentum in the demand for JGGI, caused by the strong recovery after the initial outbreak of the pandemic as investors look for the ‘safe haven’ investments during this period. In fact, over the last five years the share price has been able to return 102.2%, exceeding the trust’s NAV returns by 20.8%.

one-year performance

Source: Morningstar

Looking forward, the team see the industrial and cyclical sectors being primed to do well, including some retail areas. They are also bullish on Europe, expecting a strong recovery post-COVID-19. The team also believe that the market has taken too short term a view around some stocks during the COVID-19 crisis, and that a number of good valuation opportunities are starting to appear. The example they give is Taylor Wimpey, the British housebuilder, whose share price has not recovered from its post-crash level. The team believe that the demand for housing in Britain will outstrip supply and that Taylor Wimpey is well primed to take advantage with its strong, cash-heavy balance sheet and good growth potential through its recent land purchases.

Dividend

The dividend policy of JGGI has evolved substantially over the last few years. In July 2016 the board announced a new policy, with the first payment under the new policy being made in January 2017. JGGI now pays an annual dividend equal to at least 4% of NAV, as per its value at the end of the preceding financial year, and this is paid quarterly from a combination of income, revenue and capital reserves. The change in dividend policy moved JGGI from the AIC Global Equity category into the Global Equity Income category. In our view, the ability to pay income from capital explains much of the relative differences in portfolio weights relative to peers (as mentioned in the Portfolio section).

The most recent 2020 full-year dividend per share was 13.04p, up from 12.54p the year before.

dividend and revenue per share

Source: JPMorgan Asset Management

The board provides clarity around future dividend payments, as the current year’s income stream is announced at the end of the prior financial year. The downside to this is that the dividend resets each year, and by definition it cannot be progressive: if the NAV at the end of a financial year is below the prior year’s, then the resulting dividend will be too. The board has also guided that where the target dividend is likely to result in a dividend yield that is materially out of line with the wider market, the board may choose to set the target dividend at a level that is more in line with JGGI’s peers. The current dividend yield of JGGI is 3.5%, compared to the average 4.1% of its peers.

Management

JGGI’s management team is composed of three members: Helge Skibeli, Rajesh Tanna and Timothy Woodhouse. They are supported by the wider worldwide team of investment analysts within JPMorgan Asset Management, with 96 fundamental global research analysts at their disposal.

Helge Skibeli – Having joined JPMorgan in 1990, he is currently the global head of developed market equity research and global CIO of the firm’s research-driven process and US equity core business. He has been co-managing JGGI since 2019.

Rajesh Tanna – Rajesh initially joined JPMorgan Private Bank in 2011, where he was also a European equity portfolio manager, before moving to JPMorgan Asset Management in 2016. Prior to joining JPMorgan he worked as a European equity portfolio manager within other firms, predominantly Credit Suisse. He is the current head of the research-driven process international equity team and has co-managed JGGI since 2019, following the retirement of Jeroen Huysinga.

Timothy Woodhouse – Timothy joined JPMorgan in 2008, coming through the ranks as a European equity analyst. He joined JGGI as a co-manager in 2017.

Discount

JGGI’s discount is a ‘tale of two halves’ so to speak, and reflects the change in dividend policy we have outlined in the Dividend section. During the period of 2011–2017 the trust consistently traded at a discount commensurate with the AIC Global Equity peer group, which JGGI was part of prior to its dividend change. The AIC Global Equity peer group still trades on a 2.4% discount currently.

The story changed in 2017, where through a combination of the board’s announced change to its dividend policy the year before and the particularly strong performance in 2016, the trust began to trade at a premium. Since 2017 JGGI has largely maintained that premium, with the one notable exception of the COVID-19 crash. JGGI currently trades on a 4.2% premium, above the 0.2% discount of the Global Equity Income peer group (Source: JPMorgan Cazenove, as at 12/11/2020). In fact, it is one of only two trusts in its peer group which currently trades on a premium.

Beyond the market demand for the shares, the discount is also influenced by the board’s policy of share buybacks and issuance. The board operates a long-term policy of share repurchasing with the aim of maintaining an average discount of around 5% or less. More recently the board has elected to capitalise on the trust’s premium by issuing shares. In the four years to 30 June 2020 the trust has raised £57m by reissuing 17.7m shares from treasury, which is roughly 10% of JGGI’s £546m market cap (Source: JPMorgan Cazenove, as at 12/11/2020).

discount

Source: Morningstar

Charges

JGGI’s current ongoing charges figure is 0.56%, which is the lowest in its peer group at present and comfortably below the 0.7% average. The relatively low cost of the trust is due in part to it also having the lowest annual management fee of the peer group as well, at 0.4% of NAV. The trust offsets this low management fee by being one of the few strategies to pay a performance fee. This performance fee is 15% of the NAV outperformance over the benchmark in a given year. However, the actual payment is spread over the subsequent four years and any unpaid fees can be reduced by underperformance during that period. There is also a cap of 8% of NAV for the performance fee paid in any one year. While performance fees can be unpalatable for some investors, we believe that in this instance shareholders are compensated through the low OCF. Performance fees also better align the managers’ interests with those of shareholders, especially given the four-year clawback provision. The KID RIY for JGGI is 1.37%, though the calculation methodology for this figure can vary between trusts.

ESG

Like many strategies within JPMorgan, JGGI actively embeds ESG into its research process. The research team utilise a combination of fundamental and quantitative models when assessing a company’s ESG credentials, with these results being included in the overall investment case for each company. Where JPMorgan differentiates itself is through its use of a proprietary 40-point ESG questionnaire, which ensures that the key issues around environmental, social and governance factors are addressed for each company analysed. The themes are identified centrally, to ensure that ESG is assessed consistently across companies and is integrated uniformly across multiple strategies.

Being part of a co-ordinated effort, the JGGI team rely on the collective initiatives made by JPMorgan Asset Management when engaging with companies. Through the combined weight of the firm’s assets JPMorgan is a major shareholder in many companies, including those that JGGI invests in, allowing the firm to initiate meaningful dialogue with companies about how to identify and tackle ESG risks.

While the JPMorgan team clearly put great effort into their ESG practices across the firm’s strategies, the ESG rating of JGGI’s portfolio sits within the average of its broader global large-cap blend equity peers (as determined by Morningstar). This does not mean that JGGI integrates ESG any more or less than its peers, but rather that the results of its investment process produce a portfolio whose observable ESG characteristics are in line with the broader peer group’s. However, please note that such rankings won’t account for the wider impact of JPMorgan in promoting ESG issues through dialogue and active ownership.

Fund History

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This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

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