JPMorgan American 10 December 2019

For six months now, JPMorgan American (JAM) has had a new team behind it. In general portfolio terms, the change has not been revolutionary. However, in other ways, there have been very meaningful changes.

Since June, two highly regarded individuals (Jonathan Simon and Timothy Parton) within JPM’s US Equity team have been investing JAM’s large cap assets. What sets them and the new set-up apart, is that one is a specialist value investor, whilst the other is a specialist growth investor. Each manager has discretion when it comes to holdings, but with a strong awareness of the other in a portfolio context. The split between growth and value is expected to remain fairly evenly balanced over time, but they do have the option to strategically tilt between the styles - find out more about how the team constructs the portfolio here.

They have each been tasked with managing a highly concentrated portfolio of between ten and 20 stocks, meaning JAM’s large cap portfolio can constitute between 20 and 40 stocks at any one time. In reality, the large cap portion will typically be around 40 names. This is highly concentrated by traditional portfolio standards, and means the large cap portion of JAM has the lowest number of portfolio holdings in the North America investment trust sub-sector.

Gearing is expected to be a feature of JAM, but it is tactically employed, rather than being structural. Deploying gearing is driven by both the board and manager. In October 2018, the range agreed between the board and manager was set at 0%, plus or minus 2%. In November 2019, gearing was reintroduced in the portfolio. We examine the gearing policy in more detail here.

With the US equity market seemingly so hard for active managers to beat, Timothy and Jonathan’s specialist and concentrated approach has paid off – with the strategy having historically outperformed the benchmark as well as investment trust and open-ended peer group averages. It is clearly early days yet, with only six months having elapsed, but so far they are marginally underperforming the benchmark on a sterling total return basis, as we discuss here.

In our view, the new process is highly distinctive, reflecting as it does the best ideas of two managers with very different growth and value stock selection styles. The concentrated strategy seems especially well suited to JAM as a closed-ended fund, where the structural advantages afford more latitude to run concentrated portfolios. The result is a highly attractive core US equity exposure, in our view.

The two new managers have an unrivalled analytical resource behind them, not to mention depth of experience – with each manager having over 30 years of having seen cycles play out. This is likely a factor behind the strategy, which is named Equity Focus, having delivered higher returns than JAM’s investment trust peer group with lower volatility and drawdown. This is clearly an impressive result given the much more concentrated nature of the portfolio, and points to the diversification benefits that having two specialist growth and value managers build a portfolio together can bring.

According to Morningstar style analysis, JAM’s exposures across growth, value and core are the most evenly balanced in the sub-sector. This validates the managers’ thesis that the trust should be proof against periodic rotations between value and growth. This is an important consideration for investors who might want to take ‘US growth’ risk off the table, yet still maintain exposure to US equity markets, and makes JAM a strong potential candidate.

In performance terms, it is clearly early days yet. However, being fundamental, long-term stock pickers, we expect that Jonathan and Timothy’s historic track record of outperformance will revert over the medium term. The change in manager seems to have had an effect of slowing buybacks, but it remains to be seen whether the new managers can stimulate enough demand to stop them altogether.

The board’s work in negotiating fees down yet further makes the OCF (forecast at 0.2% for 2019, and 0.33% for 2020) very competitive relative to both active and passively managed strategies. As time goes on, and as the investment trust world gets to know the managers better, there is certainly the potential for the discount to narrow sustainably. Over the short term, the discount to the peer group average looks rather unfair.