Results analysis: JPMorgan Asia Growth & Income

• JPMorgan Asia Growth & Income (JAGI) generated impressive outperformance over the six months ending 31 March 2021. NAV total returns were 17.8% compared to a return from the MSCI AC Asia ex Japan benchmark of just 14.1%. The share price total return was 17.8% thanks to a widening premium rating.
• JAGI’s shares traded at or close to a premium to NAV over the period, with the company’s shares ending the review period trading at a premium to NAV of 2.4%, compared to a premium of 0.6% at 30 September 2020. As of 21 May 2021, they remained on a small premium of 1.6%.
• The trust pays a quarterly dividend equal to 1% of the NAV at the close of the previous quarter, supplementing revenue returns from capital reserves where necessary. In respect of the quarters to 31 December 2020 and to 31 March 2021 dividends of 4.8 pence and 4.9 pence respectively were paid, totalling 9.7 pence and reflecting the strong rebound in the company’s net assets. Two further dividends will be declared on the first business day after 30 June 2021 and 30 September 2021.

Kepler View

This was a strong six months for JPMorgan Asia Growth & Income (JAGI). At the very beginning of the period, the trust benefitted from its growth strategy being in favour. This changed almost immediately as markets began to price in good results from vaccine trials and a potential return to economic normality. However, despite the fact that value has outperformed growth in Asia since October, JAGI has continued to do well, generating excess returns against the benchmark for the remainder of the reporting period and since.

It is worth noting that most of the outperformance of value versus growth has come in a falling market and JAGI has managed to outperform the benchmark during this falling market without the benefit of its style being in favour. In our view, this illustrates the benefits of the diversification in JAGI’s portfolio, as well as the tilt towards quality growth rather than speculative stocks, and the strong impact of good stock selection as well. The graph below shows the absolute share price and NAV total returns for the trust as well as the returns of the benchmark since 1 October 2020 (values on the left hand axis). In red is the cumulative excess return of JAGI versus its benchmark and in yellow the cumulative relative return of the MSCI AC Asia ex Japan Growth Index versus the MSCI AC Asia ex Japan Value Index (right hand axis).

RELATIVE RETURNS

Source: Morningstar

Past performance is not a reliable indicator of future results

JAGI’s portfolio is focussed on quality growth companies, meaning businesses which can sustainably compound their earnings faster than the market. While JAGI performed strongly in absolute terms in 2020 overall, it slightly underperformed the index, as returns in the region were highly concentrated in a handful of companies in the ecommerce and information technology (IT) fields. JAGI did well from its holdings in these sectors, but also retained significant positions in financials and consumer areas which the managers believe have strong secular growth potential, but which performed relatively poorly in locked down economies. The managers resisted the temptation to chase performance during the lockdowns, and this decision to remain diversified has put the trust in a strong position in 2021 and contributed to its outperformance this year and since the start of the coronavirus crash last March.

Looking forward, the managers themselves highlight that valuations in Asian markets are above long-term averages. It is also true that some growth sectors and stocks are at especially high valuations. We therefore believe that earnings growth will need to meet or beat expectations this year for many companies to continue to generate good returns, including perhaps JAGI’s holdings in ecommerce and IT. However, JAGI’s diversification should benefit shareholders. The managers’ decision to retain positions in companies with greater ‘reopening beta’, such as financials and consumer discretionary stocks, means that it has captured the sharp re-ratings in these companies as vaccines are rolled out. It also means there are areas of the portfolio we believe could outperform if the re-openings go to plan. Taking a longer-term view, we believe this illustrates the benefit of key elements of JAGI’s strategy: remaining focussed on the long-term, being patient with holdings and not chasing short-term performance.

However, none of this is of any use if stock selection is poor, and here the managers have used their extensive resources in Asia well. The excess returns in the six months under review were due to stock selection, chiefly in the technology hardware, healthcare and ecommerce industries. In the hardware industry, the managers report that Samsung Electronics and TSMC both managed to grow their profits by 20% in 2020 thanks to high demand from manufacturers. In healthcare, Wuxi Biologics performed strongly, and has become one of the global leaders in its field. SEA Limited, the leading ecommerce and gaming company in South East Asia was also a key contributor. We have highlighted that stock selection has been the key contributor to returns over the long run in our previous note on the trust. We continue to believe JAGI is a good way for investors to gain access to the growth potential in Asia with something to offer for both growth and income focused investors.

Login to access the full article...