JPMorgan China Growth & Income 20 April 2022

JPMorgan China Growth & Income (JCGI) offers investors a way to participate in the longer-term growth story in China. The trust is managed by Howard Wang, Rebecca Jiang and Shumin Huang, who between them have a significant number of years of experience specifically focussed on Chinese equity investing. They are supported by a large team of locally-based analysts who cover large, medium and small-cap names across mainland China (including the A-shares market), Hong Kong and Taiwan. Together, the team have created a concentrated portfolio of best ideas that is an outcome of a fundamentals-based approach with an emphasis on earnings growth potential over the longer term.

This has resulted in excellent absolute and relative performance figures over the target horizon of five years (see Performance). However, the use of gearing and a focus on growth results in high beta, thus, the portfolio tends to be more volatile than the underlying Chinese market. The managers tend to view weakness in the market as an opportunity rather than anything to worry about, given their longer-term horizon and the inherent higher-quality nature of the portfolio. Recently the managers have downwardly resized some internet risks along with traditional energy plays and victims of cost inflation in favour of early stimulus beneficiaries such as renewables (see Portfolio).

A key attraction of the trust is its Dividend yield. The board target a 4% annual dividend yield based on the previous year end NAV, paid mostly from capital. While this allows investors to earn an income from high growth, low-yielding portfolio, it does mean that dividend pay-outs can also go down.

The market sell-off during 2021 saw the trust fall from a premium to a discount in excess of 10% by the autumn of last year. This has since narrowed to around 3.1% at the time of writing.

JCGI is an interesting way to access the growth story in China. The extensive team of locally based expert analysts provide an edge and helps the managers to identify the best investment opportunities. The Chinese economy is going through structural change as it continues to grow the wealth effect and policy measures are leading it to become a more consumption-led economy. Its manufacturing base is becoming more sophisticated, and many of its companies are playing an important role in the global transition to cleaner energy.

One of JCGI’s key attractions is the combination of growth and income it offers. The Dividends are partially paid out from capital, enabling a degree of freedom for managers to focus on earnings growth without the burden of having to invest in high dividend payers that offer little growth prospects. At the time of writing, the prospective yield is roughly 6% following the recent market downturn, however, investors should be aware that without a material recovery in the market and the NAV, it is probable that the dividend will be cut for the next financial year.

Given the geopolitical situation and concerns over economic growth, the Portfolio has unavoidably suffered, but the managers view current valuations as the most attractive they have been for some time. While the Chinese market is more volatile than most developed counterparts, we view JCGI as an appealing proposition for seekers of long-term capital growth supported by a good income.