JPMorgan European Growth & Income 28 February 2023
Disclaimer
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.
JPMorgan European Growth & Income (LON:JEGI) aims to provide a core European equity exposure designed to deliver long-term outperformance of European equities without any surprises. The portfolio is diversified across more than 90 holdings and typically should have a beta of one to the index. JEGI’s structure was simplified in February 2022 from two share classes into a single share class following the approval of shareholders. The former ‘growth’ share class is the surviving share class, and its objective and portfolio carry on in the new simplified structure.
JEGI pays quarterly dividends, each equivalent to 1% of the closing net asset value of the preceding financial year. For the current year JEGI will pay four dividends of 1p, with the last of these payable in March 2023. This is equivalent to a yield of 4.3% on the current share price.
JEGI’s risk-controlled approach does not mean that the portfolio does not evolve, as the team’s investment process involves regular reassessment of the portfolio and the universe of investable stocks. So while the three key portfolio company characteristics of quality, value and momentum remain constant, there is also a constant reassessment of which companies meet those criteria. As a result, the portfolio will tend to have a lower forward P/E ratio, higher return on invested capital and greater earnings momentum than the index. This is combined with a conservative approach to gearing, which is currently at 3%.
JEGI’s discount of c. 11% is underpinned by a performance-related tender mechanism that will be triggered if the trust underperforms its benchmark over five years, with the current performance measurement period running through until 2027.
We believe that the investment landscape could be undergoing a fundamental shift from that seen over the last five or more years. During that period, very low-cost money helped to justify valuations for growth equities that put many of them out of the reach of JEGI’s portfolio. Higher interest rates have a profound effect on valuations and require flexible thinking when constructing a portfolio. JEGI isn’t chasing big positions in a handful of the fastest-growing stocks in the expectation they will recover, but is instead taking a measured approach to incremental added value with a diversified portfolio, and the team’s emphasis on quality, value and momentum seems well suited to this rather different investment landscape.
JEGI’s current c. 11% discount is wider than the average for the peer group, but there are several factors that could narrow it in the coming year. First, the simplified structure means JEGI is a more straightforward proposition that should have a wider investor appeal; second, it has a long-term performance-based tender offer mechanism; and third, in our view its investment process seems well suited to a higher-interest-rate environment.
Bull
- Pays quarterly dividends totalling an equivalent of 4% of NAV
- Investment process suited to a higher-interest-rate environment
- Discount underpinned by performance-related tender offer
Bear
- European equities have been out of favour with investors
- May not capture all the upside in a strong growth market
- Dividends not always backed by current-year revenue
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