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Kepler Trust Intelligence
Updated 25 Jan 2022
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by JPMorgan Asia 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.

Asia investors have had a tough time of it lately. A crackdown by the Chinese government on a range of industries has hit many investors in the region, who tend to have a large exposure to companies in the world’s second-largest economy.

Despite this, it seems plausible that the events of 2021 were short-term speedbumps for investors in Asia, rather than warning signs of regional decline. For one thing, China is only one country among many in the region. More importantly, most of the trends which have supported Asian economies for much of the past three decades remain in play.

Perhaps most significantly for investors, companies in the region have become increasingly competitive and are often leaders in their field. Almost half of the world’s 5,000 largest firms are now based in the continent and, in 2020, there were more Chinese businesses in the top 500 than in the US for the first time – a trend that continued into 2021.

These companies have bolstered economic growth and helped create a burgeoning middle-class. Indeed, Southeast Asia is now the only place on earth which continues to see rapid growth in its middle-class, as well as having several countries regularly producing GDP growth in excess of 5% per year.

These traits would be positives in any market but then there’s also the simple fact that the region centered around the South China Sea is home to over half of the world’s population. To ignore it is to ignore a huge chunk of the global economy.

Earnings as the driver of growth

One investment trust that has been taking advantage of these opportunities is JPMorgan Asia Growth & Income (JAGI). Trust managers Ayaz Ebrahim and Robert Lloyd, both based in Hong Kong, look to generate a high total return for shareholders by picking companies which they believe can produce better earnings growth than the market.

In a region where bottom-up local knowledge is vital, the pair are enviably resourced with a 36-strong team of analysts, as well as country specialists located inside their target markets to support the investment process. A core responsibility for the analysts is to try and calculate expected long-term earnings for the companies they cover.

This focus on earnings growth is due to the team’s belief that increasing profits are the long-term driver of share price returns. Lasering in on this facet of a company is thus a simple way of avoiding speculation and other forms of noise that can muddy the market waters in the short term.

It’s an approach that has paid off historically, with JAGI outperforming its benchmark index and providing a more than three-fold total return to shareholders over the past decade.

Tapping into Asian tech

Unsurprisingly, the trust’s investment process typically means it holds most of its funds in growth stocks. Just as the US market has been dominated by tech over the past decade, so too has the Asian market been driven in large part by Chinese firms like Tencent and Alibaba.

JAGI has long had a strong weighting towards those two firms. That has led to some underperformance in the past year due to the government’s regulatory crackdown, but the trust managers remain convinced the pair can continue to deliver growth in the long run.

Aside from more traditional technology players, JAGI also has a sizeable exposure to the semiconductor space. Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung together control over 70% of the global computer chip industry. They’re also the two largest holdings in the JAGI portfolio at the time of writing.

The semiconductor sector, already worth approximately $600bn globally, is estimated to grow at 8.6% annually until 2028. Given the immense amount of money and human capital needed to succeed in the industry, it’s hard to see other businesses preventing Samsung and TSMC from taking advantage of that prospective growth.

You don’t have to sacrifice growth for income

These sorts of businesses may appeal to some investors but they’re often anathema to income seekers, either because they have a low yield or don’t pay a dividend at all. Investing in JAGI is a way around these problems as the trust uses its close-ended structure to pay a dividend from a combination of revenue and capital reserves.

Currently the trust’s policy is to pay a dividend equal to 1% of NAV at the end of each quarter, meaning shareholders can enjoy the benefits any prospective growth brings but still receive the income they may want as well.

At the time of writing, the trust’s shares are trading at a discount of just over 1%. Relative to other investment trusts this may not seem like much but JAGI has regularly traded at a premium in excess of 3% in the past and, while there is no guarantee that this can be repeated, the possibility that it might may appeal to some investors.

The financier Nathan Rothschild apocryphally said that the time to buy is when there’s blood in the street. With that in mind, investors who believe JAGI’s long-term strategy is likely to overcome some of the concerns we’ve seen over the past 12 months may find the current discount an attractive entry point to the trust.

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