JPMorgan China Growth & Income 13 October 2021

JPMorgan China Growth & Income (JCGI) offers investors access to the China growth story via a carefully curated portfolio of companies the managers consider to be the long-term winners in a fast-developing market. The core of the approach is the detailed stock-specific research undertaken by a team of expert analysts who are mostly based in China. They cover large, mid-sized and small companies, including the relatively less well-known onshore A-share market. JCGI’s managers, Howard Wang, Rebecca Jiang and Shumin Huang, have built a portfolio of these best ideas, aiming to generate alpha by taking a longer-term view than their peers and focussing on identifying the best opportunities for earnings growth.

Thanks to this focus on growth, JCGI has delivered excellent long-term absolute and relative returns, as we discuss in the Performance section. JCGI has tended to be more volatile than the market, albeit with gearing a contributory factor. The trust’s NAV has declined more than the market in the recent sell-off, but the managers view this as an opportunity to buy companies on weakness rather than anything more worrying, as we discuss under Portfolio.

JCGI’s portfolio is built for growth, with the Dividend policy committing the board to pay out 4% of the NAV each year, based on the previous year’s closing NAV. This means it offers an attractive dividend from a portfolio with high growth potential.

Following the implementation of the new dividend policy, the trust’s Discount narrowed considerably and JCGI started trading on a premium from early October 2020. However, after the China equity market sell-off in February 2021, the shares have moved out to a discount of c. 10%.

JCGI offers a powerful combination of growth and income. By paying a dividend partially from capital, the board has freed the manager from the obligation to purchase high-dividend-paying stocks with less attractive growth prospects. As a result JCGI offers the best of both worlds: exposure to sectors and stocks which are low-yielding, but which also have excellent growth potential and are paying an attractive, frequent dividend.

We think the team-based, active strategy is an attractive approach to investing for a long-term investor. We believe it is easier to identify and own winning stocks rather than time the market or tilt a portfolio based on the business cycle. JPMorgan’s extensive resources in China, soon to be boosted by the completion of the purchase of local manager CIFM, puts the trust in a great position.

While the recent sell-off will be unpleasant for investors, this sort of volatility has been typical of an investment in China in recent years, and may well remain so. The managers point out that the valuation of the benchmark index is now below its five-year average, while they do not believe the earnings outlook on their holdings has darkened. We acknowledge it is hard to have conviction on the short-term direction of the Chinese market, with a reasonable probability of regulatory interference in other sectors. However, we believe it likely that if one takes a long-term view, the potential for high risk-adjusted returns in China remains.