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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan European 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.
Read through most reports on the economic outlook for Europe today and you’re unlikely to find too many analysts that are particularly upbeat about the continent’s prospects. Inflation, an energy crisis, and the possibility of a recession have all combined to form what seems like a perfect storm.
But even if countries in Europe are in for a tough winter, things may not be as bad as the catastrophizing headlines can make them seem. For one, the European Union had set a target for countries to have their gas storage facilities filled to 80% of their capacity by 01/11/2022.
They have exceeded that amount and, according to recent updates, have already hit the 90% mark. This is not a panacea to the continent’s problems but, particularly if we have a milder winter, then it may mean the impact of Russia cutting off gas supplies is less severe than previously thought.
More importantly for long-term investors, it is hard to imagine countries not adapting and finding alternatives to Russian energy. For example, we’ve seen Germany halting its planned phase out of nuclear energy and a doubling of heat pump installations in Poland, where the government also appears to be weighing up using nuclear energy.
In short, the inability to access Russian energy supplies probably will create short-term headwinds for Europe but that isn’t the end of the story.If there is animprovement in sentiment toward European equities, JPMorgan European Growth & Income (JEGI) looks well placed to benefit. The trust has held up well during an extremely tough period for European equities, having outperformed all its peers in the Association of Investment Companies’ (AIC) Europe sector, as well as its benchmark, over the 12 months to 06/10/2022.
Until this year, the trust was split into two separate share classes but in November 2021 the board decided to merge them into one. This ultimately took place in February. As we’ve written before, this provided a range of benefits for investors, including greater liquidity in the trust’s shares, lower fees, and a discount control mechanism that aims to keep the discount in single digits.
The merger also meant that investors did not have to choose between accessing the dividend-paying income share class, and thus missing out on the opportunities the other portfolio provided, and vice versa.
Importantly, the dividend JEGI aims to pay now – 4% of its NAV on an annual basis – does not constrain the managers, as they are able to pay out of capital if need be. The result is that investors can now have the best of both worlds, getting a dividend without having to worry that the managers are setting up the portfolio solely to generate income.
At the same time, and although it has ‘growth’ in its name, this does not mean that the trust managers were investing in the sort of high-value stocks that have been hit hard by interest rate rises over the past 12 months.
Instead, JEGI’s managers take a balanced approach to markets, aiming to produce a core holding for European investors. The managers look to diversify by sector and region, as well as style. When making their investment decisions, the managers consider a company’s quality characteristics and valuation, as well as weighing up whether its outlook is improving and how sustainable the business is.
The goal is to deliver returns for shareholders that are in excess of its benchmark, the MSCI Europe (ex-UK), regardless of market conditions, something which they have managed to achieve over the last 12 months but also over the past decade.
They have been able to achieve this, in part because of the impressive array of resources at their disposal. JPMorgan’s huge team of European equity analysts, for example, cover hundreds of companies, which combined make up over 80% of the benchmark’s market cap. They can also use the asset management group’s proprietary investment software ‘Spectrum’, which enables analysts and portfolio managers in the group to easily share research and look through the portfolio through different lenses.
Another key component of the managers investment process is to quantify a range of risks that are likely to impact the underlying portfolio. Again, the tools at their disposal here stem from JPMorgan’s proprietary technology and allow them to carefully consider the impact of macroeconomic factors – Brexit for example – as well as aiding them in managing their sectoral exposure.
All of these efforts do appear to pay off. The trust’s portfolio offers investors a balanced, ‘one stop shop’ portfolio for European equities. More importantly, they have continued to achieve their goals of outperformance, even in a very tough year for European companies. Despite this, the trust is now trading at a wide discount to NAV of close to 11%. Assuming European companies do weather what may prove to be a harsh winter, it’s plausible this could narrow as the outlook for businesses on the continent improves.
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