JPMorgan Global Growth & Income 29 September 2023

JPMorgan Global Growth and Income (JGGI) offers investors an unconstrained, style-agnostic portfolio of the managers’ highest conviction ideas from a truly global pool of equities. The managers, Helge Skibeli, Tim Woodhouse, and James Cook, take a bottom-up investment approach which seeks to identify high-quality companies capable of delivering sustainable, long-term capital growth.

The managers are supported by the breadth and depth of JPMorgan’s internationally diverse research engine. This provides them with access to 93 specialist equity analysts, with an average of over 19 years of industry experience, to help them uncover the key financial drivers of returns across a global universe of 2,500 equities. The managers focus on identifying three key criteria during stock selection including a significant opportunity for; a company to deliver valuation upside through the quality of its long-term earnings power; a clear insight into what makes the company perform; and a high conviction in the company as determined by whether it is the ‘Master of its fate’ through its quality, the resilience of its balance sheet, and effective, forward-looking decision making from management teams. Equal importance is placed on all three characteristics, which we believe gives them a better chance of generating alpha over the long term.

Aiming to have a clear insight into what makes a company perform is intended to help avoid potential value traps in discounted stocks. It also helps the managers trade companies more effectively as they can better understand whether a pullback in earnings or share price is the result of a crack in the investment thesis or an opportunity to add to the stock. One particularly volatile group of companies has been the Covid beneficiaries, and in a recent meeting James noted that since the start of 2022, despite some delivering higher margins, they have become more cautious around this group of stocks and believe these earnings are unsustainable and at the most risk of declining. This is reflected through the reduction in industrials and consumer cyclicals, which had previously been a dominant sector in the portfolio.

Instead, the managers have seen opportunities to buy into large tech companies on the back of share price weakness, such as Meta and Amazon. Meta raised shareholder concerns by ill-disciplined capital allocation decisions between 2021-2022, and Amazon faced a short-term headwind due to the £160bn investment in a state-of-the-art warehouse distribution centre. However, Meta’s management team has looked to improve their capital discipline through significant buybacks and a 10% reduction in headcount. For Amazon, Helge, Tim, and James believe the long-term trajectory is still intact with efficiency gains related to next-day delivery and lower prices. The pullback in valuations and strong performance of the technology sector has led to an increase in allocation over the course of 2023 and it now makes up a quarter of the portfolio. However, Meta and Amazon’s respective share price gains of 145% and 68% this year to date highlight the importance of an active management style – as demonstrated by JGGI’s 81.1% active share.

The team’s investment process leads to a relatively high-conviction, benchmark-agnostic portfolio, with their quality screens leading to less than 3% of the companies in their investment universe being considered for the typically 50-holding portfolio. The top ten currently account for 34.3%, however, position size can vary, depending on the conviction, as shown by the top ten overweight positions in the table below. Compared to the MSCI ACWI Index, the portfolio demonstrates superior characteristics through its quality of earnings, as classified by JPMorgan’s premium/quality strategic classification (see previous note), faster earnings growth over a three-to-six-year period, and importantly offers this at a similar price or better value than the market.

Source: JPMorgan Asset Management, as at 31/07/2023

Although there are some clear high-conviction positions in the holdings, the managers will also look to maintain an element of diversification across sectors, as shown in the chart below. They believe this is a better way to try and bolster the sustainability of capital growth and income generation for shareholders across the market cycle. As such, they are exposed to a broad number of themes whilst having high-conviction allocations to what they perceive to be the most attractive stocks within those themes. For example, the long-term holding in Microsoft provides exposure to the rapidly growing transition into cloud computing and AI, however, it is already a market leader because of the repeatability of contracts and the services the Microsoft Office suite provides to both commercial and private consumers. In addition, they view TSMC as a way to play the AI theme without betting on which will be the winner in delivering AI services. As the world’s largest semiconductor foundry, TSMC is likely to be a core beneficiary across its diverse product line as the supply of chips needs to increase. However, following the Q2 earnings announcement from Nvidia they initiated a position in the company, which now makes up 3% of assets, as they felt they gained a clearer insight into the future growth trajectory of the company.

Historically, the flexibility afforded to the managers through the ability to pay the dividend from capital has meant there has been a growth tilt to the portfolio. However, over the past couple of years, the managers have tried to shift this exposure to provide a more stylistically balanced portfolio to dampen the impact of tougher macroeconomic conditions. This more stylistically neutral exposure can be demonstrated by the reduction in the trust’s beta to the ACWI from 1.06 over five years to 1 over three years. In our view, this has enhanced the trust’s consistency of performance. Despite this shift, according to Morningstar JGGI has a 39% allocation to growth compared to the peer group average of 18%.

However, investment decisions remain founded on the fundamental characteristics of the holdings with individual stock risk accounting for 77% of portfolio risk. The rotation out of some higher growth positions that performed strongly following the post-pandemic bounce, and cyclical positions that the managers believe have run out of room to grow, has freed up capital for a more diverse range of sectors in the portfolio where they see a long-term, structural growth opportunity from leaders in their respective industry. For example, Deere & Co has impressed the managers through its continuous investment and research and development of its ‘precision agriculture’ arm which is centred around using artificial intelligence data to improve crop yields on a far greater scale than its nearest competitors.

The managers believe the elevated levels of macro uncertainty are likely to keep pressures on earnings with expectations remaining overly optimistic. As such, the focus remains on the companies that have high barriers to entry, a competitive advantage, and, importantly, strong pricing power to be able to pass on any cost increases, alongside those that can maintain margins and minimise the impact of a price squeeze. For example, Mastercard has been able to increase its pricing whilst continuing to benefit from the shift to a cashless society. In addition, tighter lending standards have led to an increase in companies that are likely to benefit, such as banks, but also asset-light businesses which can grow without having to deploy significant amounts of capital, such as CME Group.