Thomas McMahon
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Updated 20 Apr 2022
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by JPMorgan Global Core Real Assets . 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 Global Core Real Assets (JARA) has recorded strong returns in the twelve months ending 28/02/2022, with a NAV total return of 12.75% during a volatile period for equity markets. This was higher than all trusts in the AIC Infrastructure sector except 3i Infrastructure, according to Morningstar data. JARA fully invested its IPO proceeds at the end of 2020 and became essentially fully invested (inclusive of new capital raised) in the first half of 2021. In each of the quarters to August and November 2021 it generated a NAV total return of c. 5%. The portfolio saw good returns across real estate, infrastructure and transportation, with real estate seeing the best local currency returns. JARA’s c. 60% dollar exposure has been supportive in the last few months, helping it as a defensive allocation, however, we note for the whole year local currency returns were still impressive at 9.8%.

JARA offers a globally diversified portfolio of real assets, investing mainly through institutional funds run by the JPMorgan Global Alternatives business. The portfolio is intended to offer to the mass market strategies and asset classes which are hard to otherwise access and are likely to diversify the real assets exposure UK investors typically do hold. For example, the real estate exposure focuses on core assets in the US and Asia, whereas we believe most UK investors are likely to only or mostly hold UK property.

In US real estate, JARA invests mainly in logistics, although residential is another significant area of conviction, with JARA able to benefit from the strong US rental market by funding new supply. In Asia the real estate exposure focuses on logistics, aiming to invest in the earlier stages of trends which are further advanced in the developed Western markets, taking advantage of wider spreads available in the region. On a look-though basis, logistics accounts for 18% of the total portfolio, with JARA available essentially at par at the time of writing (or a premium of 0.2%), compared to hefty premiums for sector specialist trusts.

Within all allocations the intention is to provide core exposure. This should bring stability of returns and less economic sensitivity, potentially an attractive quality in an uncertain economic environment. This means focusing on tier-1 cities for real estate, and for larger and more resilient assets across the portfolio. In infrastructure the focus is on utilities, specifically in contracted power which brings natural defensiveness and pricing power. In transportation the focus is on maritime assets which are benefitting from supply chain issues and under-investment in new supply, especially large ticket vessels contracted with large multinationals.

Another key attraction is the resilience of the income. C. 65% of the income generated by the portfolio is index-linked, with JARA’s income account therefore expected to benefit as inflation rises around the world. JARA aims to pay a dividend of 4-6% of the issue price out of a total return of 7-9%. It is currently paying 4p a year, which based on the share price at the time of writing is a 4.2% dividend yield. The inflation-linkage is a potential source of income growth, which could put the board in a position to raise the dividend further.

JARA has exposure to multiple assets involved in the energy transition. Renewables make up 5% of the portfolio and the known pipeline should see this increase significantly. Meanwhile, the transportation exposure also includes assets contributing to this theme. This is through the energy logistics sub-allocation, which includes vessels used in maintaining offshore wind farms, LNG tankers and energy storage vessels. It is also through the funding of production of energy efficient tankers and container ships, and even a fleet of electric river barges, which JARA has forward funded through the transport strategy, expanding the world’s eco-friendly shipping fleet.

JPMorgan is a major global owner of renewable energy, having assets which can generate around 10GW of energy. This means that JARA has a wide platform of assets to choose from, and this will likely lead to many opportunities in the future. One interesting theme the managers see at the present time is the contribution switching to dual-fuel liquefied natural gas (LNG) tankers that use the LNG as fuel as well as bunker fuel and so can make significant inroads to reducing emissions. LNG is far cleaner than coal or oil and transitioning from ‘dirtier’ fossil fuels to LNG will make a huge contribution to reducing emissions until non-fossil fuel alternatives are ready. In the current political environment with high oil costs, the shut out of Russia from Western markets and the pressure to decarbonise, natural gas has grown in importance as this argument has become persuasive. JARA has participated in forward funding 14 LNG carriers, some of which are still in construction and will steadily come into the portfolio and generate an income. JARA’s dual-fuel fleet exposure will be up to 60% more fuel efficient than legacy assets, and are expected to make up 4-6% of the portfolio when fully acquired. JARA is only able to take a slice of this c. $3bn fleet by accessing JPM’s sizable platform.  We note that, at the aggregate portfolio level, assets in development amount to less than 3% of the portfolio and are expected to remain low on an aggregate basis. Aside from the vessels still in construction, we understand the focus in the transportation allocation is now on the energy logistics sub-sector where JARA is more likely to make new acquisitions.

One of JARA’s great strengths is that unlike many other real assets trusts it can be flexible with its asset allocation given its cross-asset remit. JARA has recently also boosted its allocation to real estate debt with an investment in a US Real Estate Mezzanine Debt strategy. This is a portfolio of 15 loans, 64% of which are floating rate and with a low duration of just 2.7 years. The allocation should boost the income earned by the portfolio, and was funded with cash and capital from the liquid REITs strategy JARA invests in, in part to provide liquidity.

Kepler View

JARA had somewhat of a baptism of fire, launching six months before the pandemic hit and investing IPO proceeds into markets in turmoil. A key factor depressing the NAV as the portfolio became more heavily invested towards the end of 2020 was the exposure to the US dollar which worked against it and offset local currency gains in the portfolio. What we have seen over the past year is JARA working as intended, with a fully invested portfolio grinding out steady returns from a globally diversified portfolio of real assets and at the same time generating an attractive yield. While dollar strength has helped over this period, the vast majority of sterling returns are due to local currency performance.  

We think the recent discount now looks anomalous, and in recent weeks it seems the market is catching up, with the discount narrowing from double digits at the start of February. In our view dividend increases would increase the chance of JARA trading consistently back on a premium, as the infrastructure and renewables infrastructure trusts mostly still offer a higher share price yield. One factor which could support this possibility is the high exposure to index-linked income in the portfolio, around 65% of the income generated. We think this is a highly attractive feature in the current inflationary environment.

Taking a long-term perspective, we think the scale of the resources and the platform that JARA has access to, and its flexibility to use these, makes it look highly attractive as a core real assets allocation. The portfolio now has exposure to 236 investments and over 1,000 underlying assets. These are spread across 26 countries, with 28% in the fast-growing Asia Pacific region and just 2% in the UK, where investors are most likely to hold real asset exposure. Just over 52% of the assets in the portfolio are wholly owned by JPMorgan, with a further 14% majority owned and 31% owned in a joint venture.

One of the differentiating factors from the other infrastructure trusts comes from the structure. JARA allocates to internally run JPMorgan strategies, mostly institutional open-ended funds with a lockup. This, and the allocation to liquid REITs, means that, with a lag, JARA can switch its allocation tactically without having to issue new shares. This flexibility has been used in the past six months, with JARA allocating capital to mezzanine debt. The team are also able to forward fund assets, which they have done with the LNG tankers, commissioned in 2019 and now coming on stream. We don’t think there is another infrastructure fund with both the global diversification JARA offers and the flexibility to tactically alter positioning, all of which is made possible by its access to JPMorgan’s broad platform of private assets.

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