Results analysis: JPMorgan American

• JPMorgan American (JAM) produced a net asset value total return of 24.7% in the year to 31/12/2023 compared to the trust's benchmark, the S&P 500, which produced an 18.9% total return.
• Outperformance was mainly driven by good stock selection. Contributors included semiconductor stock NVIDIA, which rose over 200% after a sequence of positive earnings revisions. Semiconductor design company Advanced Micro Devices also performed well, with both stocks benefitting from tailwinds relating to Artificial Intelligence (AI). Digital security company Palo Alto Networks saw gains due to the increasing priority corporates are placing on cyber-security. Travel company Booking Holdings reported record earnings as the industry continues to bounce back from the pandemic and the company has cemented its leading position.
• Detractors included Bristol-Myers Squibb and Bank of America, although the manager remains confident in the longer-term prospects for both and the holdings were retained. A position in SolarEdge Technologies was sold.
• Since JAM implemented its current investment strategy on 01/06/2019 to the end of February, it has generated a NAV total return of 116.3% compared with a benchmark return of 97.3%, an annualised outperformance of 2.2 percentage points.  
• During the year, JAM traded between a discount of 7.3% and a premium of 0.4%. Under normal circumstances the board is prepared to buy back shares at anything more than a small discount and during 2023 bought back £45m, or 2.5%, of the trust's shares at an average discount of 3.8%. Post-year end, JAM has traded at a premium and re-issued 150,000 shares from treasury.
• At 31/12/2023 91.5% of JAM's assets were invested in a 40-stock US large cap portfolio, with 54% of this in growth and 46% in value stocks. The small cap portfolio made up another 6.5%, with the balance in cash or near cash. In November 2023, the small cap portfolio, previously a growth strategy, was altered to a blended growth and value approach, more in keeping with the large cap strategy.
• JAM was geared 2.8% at year-end and is currently geared 3.1%.
• Total dividends of 7.75p  represent an increase of 6.9% on the previous year. JAM has 1.6 years' revenue reserves. The dividend represents a yield of c. 0.8% on the current share price.
• Dr Kevin Carter, chair, said “It is encouraging to see inflation trending down and the US economy performing more strongly than expected, and seemingly likely on the glide path to a soft landing. This bodes well for US equities in the year ahead, although there are, as ever, potential threats, especially on the geopolitical front. There is an unusually high degree of uncertainty about the implications of the US presidential election outcome later this year for both domestic US policy and for the nation’s international relations. However, the Board believes that the Company’s Manager has already demonstrated its considerable skill in navigating the many unique challenges equity markets have faced over recent years, as evidenced by their performance track record. The Board is confident that the investment process and deep resources of the Manager, in combination with the Company’s investment structure and policy, continue to present shareholders with an attractive long term investment proposition."

JPMorgan American's (JAM) performance in 2023 is a good illustration of how a flexible portfolio which encompasses both value and growth, both with an emphasis on quality, can capture opportunities in the market that could have been missed by a single-style portfolio. Remember, JAM is a core holding and although a relatively concentrated portfolio, it is not a single-sector specialist. To produce such strong outperformance in 2023, when the market was dominated by a very narrow group of stocks in the technology sector, is a testament to the team's stock-picking.

This performance has, in our view, cemented JAM's position as a core holding, and even as the investment trust sector is on average experiencing very wide discounts, driven by sentiment and technical issues such as cost disclosures and the consolidation of the wealth management industry, a significant shareholder of investment trusts, JAM has retained a narrow discount or premium. JAM in our view provides a template for what a successful equity investment trust looks like: an investment proposition that is clearly understandable, adds value through a well-thought-out active strategy as well as through gearing, and which is able to step in and buy shares back when needed, without any particular concerns about what that might do to the portfolio mix, or to gearing. With M&A picking up speed in the investment trust sector, JAM is a good example for trusts wondering what the benefits of scale are w, not least because JAM's significant outperformance came with an ongoing charges figure of 0.38%.

The team's outlook for the US centres around an economic soft landing accompanied by lower inflation and falling interest rates, combined with relatively stable oil prices. They do though acknowledge the various risks around this, from a US presidential election to rising geopolitical tension, as well as the longer-term impact of higher interest rates and fiscal deficits. And while valuations in the narrow group of stocks that led the S&P 500's performance last year may be at the optimistic end, the team sees many valuation opportunities elsewhere. Indeed, the team notes that a great deal of 'cautious cash' remains invested in money market funds as investors climb the proverbial wall of worry, which could provide significant momentum to the equity market if that starts to flow back into equities. This chimes with our recent observation that UK investors are typically underweight the US, and in our view JAM provides a very well thought-out core holding for any investor seeking to rectify that situation.

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