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Not the usual suspects

Investors are increasingly seeking a combination of growth and income but with dividends under pressure on the UK and Europe, it makes sense to consider your options further afield…
Kepler Trust Intelligence
Last update 27 April 2021

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.

It’s a classic doctrine of investing; you must choose income or growth. Companies in ‘growth mode’, still focused on investing in their businesses for future growth, simply don’t have the spare cash to pay out dividends. Meanwhile, companies that do are often able to because they’ve stopped investing in the drivers of growth, such as research and development.

For many investors, however, their needs cannot be reduced down to an either/or equation. They may have some need for income, but not enough to sacrifice their exposure to growth.

A narrow pool

An increasing number of funds have sprung up to fill this need. Yet, there is little choice among them. This is because the vast majority of funds with any kind of ‘income’ mandate invest in a limited range of markets, chiefly the UK, Europe and, to a much lesser extent, the US. While historically UK and European companies have been the highest dividend payers globally, this restricted regional focus does not come without its challenges, onto which the onset of the Covid-19 pandemic shone a harsh light.

As multiple governments introduced strict societal and economic lockdowns in March 2020, the outlook for companies suddenly became much less clear. This prompted a swathe of dividend payers to cut or stall their pay outs. In the UK, total dividend payments in 2020 fell by a staggering 44%, according to the 2020 Link Dividend report. European dividends also saw cuts, albeit less dramatic.

At the same time, many of the UK and Europe’s dividend payers fulfil the brief of a traditional income stock – but fail to meet the growth requirement with as much success. As a result, the pool of potential stocks for an investor seeking both growth and income is restricted by focusing on these regions alone, leaving investors exposed to the risk of very concentrated portfolios.

Further afield

To achieve a diversified exposure, investors could consider looking further afield. Asian equities have not traditionally been associated with income and so may fall under the radar of many investors with that aim in mind. However, by leveraging the unique benefits of the investment trust structure, JPMorgan Asia Growth & Income (JAGI) seeks to offer investors exposure to growth while providing an income.

JAGI pays a dividend of 1% of NAV per quarter, based on its NAV from the previous quarter [adding up to approximately 4% per annum]. While most funds pay out dividends from income return or ‘natural yield’ – i.e. the dividends they receive from their underlying investments – JAGI can and does pay out its dividend from total return meaning some of its dividend is paid out of capital returns, such as  profits it has accumulated from selling shares in its underlying portfolio holdings.

The advantage of taking this approach is that it enables the trust to provide its investors with an income without compromising the managers’ focus on growth.

Big fish, big pond

The three named managers – Hong Kong-based Ayaz Ebrahim and Robert Lloyd, and London-based Richard Titherington – select stocks from across Asia that exhibit a combination of generating consistently higher earnings than the market, and which are higher than accounted for by current prices.

The management team choose stocks for the portfolio from the best ideas of a team of 36 in-house analysts covering the region, 25 of whom are based in Asia, with the aim of generating significant long-term outperformance of the MSCI AC Asia ex Japan benchmark.

While they choose stocks based on each stock’s own fundamental qualities, this has led them to having a portfolio biased towards some of the most prevalent themes in Asian and global society today. This includes consumption growth, technological advancement and increasing demand for sophisticated financial products.

This approach has paid off over the long term. Over the five years to 10 March 2021, on an NAV basis the trust has outperformed the iShares MSCI AC Asia ex Japan ETF, a passive investment in Asia, by 47.6%. It is also consistent, having outperformed its sector in each of the last four years and in seven of the past nine. On a comparative basis, JAGI is the top-performing Asian income trust over the past five years, although it only introduced its current income mandate in 2017.

An alternative option for income and growth

Many investors now actively seek to receive some income from their portfolios while maintaining their exposure to growth, but the pool of funds from which they traditionally fish is very focused on a limited number of markets. Funds like JPMorgan Asia Growth & Income offer the possibility of welcome diversification, and exposure to the potential for capital growth alongside a resilient stream of income from underlying stocks which are very different to the ‘usual suspects’ found in many UK investors portfolios.

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