Results analysis: JPMorgan Asia Growth & Income

• JPMorgan Asia Growth & Income (JAGI) has reported strong NAV returns for the year ending 30 September 2021. The NAV total return was 13.7% compared with 9.7% for the MSCI AC Asia ex Japan benchmark. However, the shareholder total return was lower at 3.6% as the shares moved from a small premium to a discount of 8.3%. That discount has since closed, and JAGI traded on a premium of 0.6% as of 06/12/2021.
• Returns were strong for the trust and index until mid-February, since then the NAV has declined. This has been driven by a sell-off in China due to concerns about regulatory interference, a speculative bubble in the real estate market and a slowdown in growth.
• JAGI has generated returns close to those of the index during the sell-off. Not having exposure to the private education sector helped, as did the overweight to South Korea. Chinese holding Wuxi Biologics continued to outperform. On the other hand, major holdings Alibaba, Tencent and Ping An were all relative detractors.
• JAGI pays a quarterly dividend equal to 1% of the quarter end NAV. The 2021 financial year saw the highest dividends paid by the trust under the new policy of 19.3p per share.
• Despite the shares moving to a discount in August, over the year as a whole the board was a net issuer of stock, with 3.7m new shares issued to the market, c.4% of the weighted average number of shares in issue in the previous financial year. Buybacks have been implemented since the trust slipped onto a discount, and the board has reaffirmed that it monitors the discount closely and will continue to take action if the trend diverges from that experienced by JAGI’s peers.
• Chairman of the board Bronwyn Curtis commented that despite the sell-off: “The board firmly believes … that Asia continues to offer significant opportunities for international investors. These flow, in part from long-term structural and social changes and in part from the growing number of well-managed companies, running dynamic businesses in exciting areas from technology to healthcare.”

Kepler View

In our view JPMorgan Asia Growth & Income (JAGI)’s strong results burnish its credentials as a potential core holding for growth or income investors. While the trust performed strongly in the first part of the year, it is pleasing to see it held its own in the sell-off. While some of JAGI’s largest long-term positions underperformed after February, other positions held the fort, showing how a diversified, long-term stock-picking strategy can work well if the right stocks are picked. The focus on the long-term and on picking stocks rather than timing the market are disciplines that we think should serve an investor well over the long-term and increase the chance of generating outperformance.

The extensive resources the managers can call on in the region – 36 locally based analysts – and the rigorous investment process with a focus on risks and earnings growth are attractive attributes for a core long-term holding in our view.

For income investors, one of the key attractions is the diversification offered. As well as the obvious geographical angle, JAGI’s ability to pay a dividend from capital means it can invest in low-yielding companies with great growth potential, offering income investors a way to enjoy their income without having to sacrifice capital growth. This contributes to a higher allocation to the information technology sector than the average UK equity income investor will likely have, and it allows the managers to hold a company like Wuxi Biologics, one of the key performers in FY 2021, which doesn’t pay a dividend at all.

The fate of China will continue to be critical for Asian markets. Alone it makes up over 38% of the trust’s benchmark and over 45% when Hong Kong is included. The news flow is very negative around the country at the moment, but that is often a good time to buy. Clearly the issues worrying the markets are real – the real estate market is troubled, regulatory interference remains unpredictable, political confrontation with the West is likely to continue. However, for the long-term investor the question has to be whether Chinese companies will continue to generate attractive growth in earnings and dividends. For all the regulatory interference of the past year, we think the country’s authorities are committed to capitalism and to integrating their economy with the world’s, and China will continue to offer growth opportunities. The managers point out in the annual report that while interference has resulted in challenges in certain industries, it has led to investment opportunities in healthcare and factory automation. JAGI offers an attractive level of exposure to Chinese growth, along with a best ideas portfolio from around the region.

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