JPMorgan Claverhouse 24 February 2021
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan Claverhouse. 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.
JPMorgan Claverhouse (JCH) seeks to provide both capital and income growth from UK equities. It has a long track record of delivering dividend growth and the board recently announced the total dividend was up 1.7% in FY 2020, the 48th consecutive year of increases. JCH is the only AIC UK equity income ‘dividend hero’ to have achieved dividend growth ahead of inflation every year for the last two decades.
The current dividend yields 4.6%. As discussed under Dividend section, revenue reserves have been used this year against a backdrop where UK dividends declined c. 39% over 2020. With JCH’s revenues showing around half of this decline the annual report (expected mid-March) will show how much of the reserves have been used to support the dividend. However, the managers are optimistic that we will see a recovery in income paid in 2021, although it may take some time to get back to 2019 levels.
JCH is one of the few equity income trusts that offers a pure UK exposure. The managers’ investment process emphasises a bottom-up stock-picking approach focused on company fundamentals, seeking diversification by holding companies that ‘move to different beats’. In the team’s view, stock-picking combined with risk management have ensured JCH has outperformed by 2.7% pa since William Meadon was appointed as manager in 2012. 2020 saw much of Q1 underperformance clawed back, finishing the year only 1.6% behind the index. In December 2020 the team shifted the emphasis of the portfolio towards economic recovery (oil, domestic banks), with promising early signs.
Despite the high yield, JCH currently trades on a discount to NAV of 3.8% (as at 19/02/2021).
In a world starved of income, we think that JCH’s dividend yield of 4.6% is attractive in absolute and relative terms. We think the increased dividend this year despite the tumultuous backdrop shows the structural advantages that investment trusts bring to equity income investors.
The managers have done a good job in avoiding the worst of the dividend cuts seen in the UK market. Furthermore, having a decent revenue reserve benefits JCH in two ways. Firstly, whilst nothing is guaranteed, shareholders can have a degree of confidence on the future trajectory of dividends. Secondly, the flexibility that revenue reserves offer the managers means that they are far freer than an open-ended fund manager to pursue total returns rather than income for income’s sake. As JCH’s managers have shown by their subsequent outperformance, this was a valuable tool to have at a turbulent time such as early 2020.
William and Callum’s stock-picking operates within a strict risk management framework, which has historically helped deliver slow but steady outperformance of the benchmark. High gearing contributed to marked underperformance in Q1, but pragmatic stock picking has driven outperformance since then. Having traded on a premium in the first half of 2020, JCH’s shares have de-rated to a discount of 3.8%. With UK equity market valuations looking attractive on an international basis, William and Callum’s track record of steady long-term outperformance make it a potentially attractive vehicle for investors wanting pure UK listed company exposure.
|High dividend yield, with a strong track record of dividend growth, backed by a deep revenue reserve
|Gearing higher than average for the sector, which can exacerbate downside (as much as amplify the upside)
|Consistency of positive relative returns in recent years
|Whilst board have been buying shares back recently, the discount target of 5% is not guaranteed
|Portfolio biased towards economic recovery
|UK economy might not recover as fast as some expect