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.
A couple of years ago, this author worked with someone who was beginning to get rather frustrated by their investment platform provider. One of their major holdings was an index-tracking ETF and, although they could see that the index was yielding about 3%, they weren’t getting any dividends paid into their account.
Unfortunately for the individual in question, it wasn’t the platform provider that was at fault. No dividends were being paid to them because they had bought an accumulating ETF, rather than a distributing one. Dividends were reinvested by the ETF issuer for a total return as a result, rather than being paid out to shareholders in the fund.
It would be easy to write this off as the bumbling error of a beginner investor. To the contrary, this person had a relatively large portfolio and worked in financial services. Perhaps they should’ve known better but it’s a mistake anyone could make.
It’s easy to gloss over the fine print when most of what we’re focused on as investors is usually the actual investments. This is as true in the investment trust world as it is with ETFs, or really any other investment product.
A very simple example of this might be a trust’s benchmark and performance-related fees. If the trust decides to benchmark itself against an index that’s easy to outperform, managers can then rack up higher performance fees. Those are then passed on to shareholders, who could easily see a resulting decline in the value of their investment in the trust, but not even realise what’s going on.
The reason we typically don’t look at these sorts of things is that we get sidetracked by the investments that a trust makes. Poring over a portfolio and trying to work out whether you agree with the decisions a manager has made is often much more enjoyable than looking at the legal fine print.
My interaction with the unfortunate ETF buyer came to mind when looking at the changes JPMorgan European Growth & Income (JEGI) announced towards the end of last year.
The trust, which was named JPMorgan European Investment Trust previously, has historically been split into two separate share classes. Holding one class of shares gave you exposure to a portfolio more geared towards capital growth. Investing in the other share class meant getting exposure to an income-seeking portfolio.
In October of last year, after a review undertaken by the trust’s board, the decision was taken to merge the two parts of the trust into one. As of February 2022, the trust now only has one share class, which gives shareholders exposure to the best of both worlds from a single share class structure. The company allows growth-oriented investors to participate in the attractive long-term growth potential of European stock markets while also aiming to deliver a predictable dividend to income seekers. The trust will also see improved liquidity due to it being a much larger, single investment vehicle.
Underneath some of these large-scale changes were a number of striking changes to the trust’s structure. Most of these seem very much geared towards improving the options available to shareholders.
On the most basic level, the trust has slashed its management fees. Previously the trust had a flat fee of 0.74% across both share classes, the trust’s board has cut that number to 0.55% on net assets up to £400m and 0.45% on any assets held in excess of that amount.
Dealing in fractions of a percent can make it seem as though we’re talking about insignificant amounts of money. But assuming the trust has £500m in net assets, that would mean a nearly 30% drop in management fees for shareholders, worth more than £1m in cash terms.
Another step the trust has taken since the merger is to introduce an active discount management policy. The trust has committed to keeping any discount in its share price relative to NAV in the single digits, assuming that market conditions are normal.
And somewhat similarly, if JEGI’s managers underperform their benchmark in the following five years, a tender offer will be made for 25% of the trust’s outstanding shares. Those purchases would be made at NAV prices too, so shareholders needn’t fear about selling at a discount.
Don’t sacrifice growth for income
Perhaps the most attractive change JEGI has made was to its dividend policy. Previously income-seekers would have to buy into the appropriate share class if they wanted a higher yield, potentially sacrificing the opportunity to get exposure to companies more geared towards capital growth as a result.
That no longer is the case as, post-merger, the trust has adopted a policy of targeting a dividend equal to 4% of the trust’s NAV at the end of its financial year. If there is not enough income from the underlying portfolio to pay this then the trust can make full use of its investment trust structure to pay income from capital.
This is likely to be a big positive for many shareholders. The growth segment of JPMorgan European outperformed its benchmark and delivered strong returns over the past decade. Investors can now get exposure to that management style without having to worry about missing out on income.
Along with lower fees, discount management process, and potential for buybacks if underperformance occurs, this makes the changes that took place at JEGI far from cosmetic. The fine print may not always be the most exciting thing to read, but in this instance it’s worth a closer look..