David Kimberley
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Updated 14 Jun 2022
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by JPMorgan European Growth & Income. 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 European Growth & Income (JEGI) has released its financial results for the year ending 31/03/2022. In an extremely volatile period for markets, the trust’s managers were able to deliver NAV total returns of 7.5% and share price total returns of 9.8%. This was well ahead of the 5.5% returns that JEGI’s benchmark, the MSCI Europe ex UK Index, produced in sterling terms over the period.
  • During the period the trust’s discount tightened from approximately 16.3% to 13.9%. In the subsequent period it has tightened further to 11.8%, which is slightly narrower than its peer group average of 13.0%. This reflects both a bounce back in relative performance, as well as the active discount control policy, which has seen the trust buy back 434,384 shares since the end of the reporting period.
  • Shareholders approved several major changes to JEGI’s structure towards the end of the period, which could prove beneficial to existing shareholders and make the trust more attractive to prospective investors. Most notably, the trust now has a single share class – as opposed to two – with net assets close to £450m at the end of May 2022. This is intended to improve liquidity in the trust’s shares and may help to limit the discount at which the trust may occasionally trade.  
  • Substantial changes have also been made with regard to the income component of the trust. JEGI will now pay a dividend equal to 4% of NAV at the end of its financial reporting period. Dividends will be paid out on a quarterly basis in July, October, January, and March. The trust will make full use of its structure as an investment company and pay dividends from capital if required, allowing the managers to focus on investing in companies they believe are likely to deliver optimal returns for shareholders.
  • The changes also resulted in management fees being cut by 20bps to 0.55% on net assets, up to £400m. The fee will be reduced again to 0.40% on any assets held in excess of that amount. This means JEGI now has one of the lowest ongoing charge ratios in its AIC peer group. The trust has also cut the notice period for management to six months, meaning it can switch managers more easily if the board believes the need to do so has arisen.
  • Chairman of the board Josephine Dixon said: “The board has confidence that the structure and objective of the company is now clear and provides a good basis for shareholders to maintain a core long term holding in European Equities whilst providing an enhanced income. Your board also continue to believe in the ability of the JPMorgan team to navigate these difficult markets and together that provides some assurance to shareholders in these uncertain times.”

Kepler View

JPMorgan European Growth & Income (JEGI) has always provided investors with an opportunity to get core, long-term exposure to European businesses and this continues to be the case today. However, we believe the changes that the board made at the start of 2022 – towards the end of the trust’s last financial year – make it a much more robust offering for existing shareholders and prospective investors. Lower fees and a substantially larger asset base may help to improve liquidity, attract investment from investors who need greater liquidity, and potentially reduce the discount at which the trust may trade.

The new dividend policy also means JEGI is making full use of its structure as an investment trust, with the ability to pay dividends from capital where needed. We believe this is a much-improved solution for shareholders and prospective investors, who previously had to choose between two separate share classes. It also means the fund managers are freer to focus on picking the best companies to deliver optimal returns for shareholders, rather than factoring the need for income into the investment process.

While previous investors in JEGI’s growth share class will benefit from increased demand for a more attractive structure, we believe that it is income investors who may see the biggest advantages from the new structure. By no longer restricting the manager to higher yielding stocks, JEGI can offer income investors a seldom found stylistic exposure, with the capacity to invest in low-yielding, higher-growth stocks, without sacrificing JEGI’s yield, offering what we believe are clear advantages through both higher potential total returns, and the ability to offer enhanced diversification potential to more conventional income strategies.

JEGI’s management team has always taken a balanced stylistic approach to the market looking for a mixture of quality, valuation, and momentum characteristics when making their investments. During the period under review, the trust’s weighting to cyclicals, particularly financial services and industrials, helped drive outperformance of both the benchmark and the trust’s sectoral peers. In the period since then things have been much more challenging, with the mix of inflationary fears and the war in Ukraine creating a huge amount of uncertainty and volatility in the markets.

Having said that, the trust has recovered from the post-invasion drawdown, and the hit to NAV was substantially lower than many of its sectoral peers. We believe this reflects the approach the managers take to markets. Although they have been prepared to pay higher valuations at times, the portfolio has a good exposure to quality and valuation characteristics which can prove protective in sell-offs. Uncertainty and volatility seem likely to continue in the near term. However, the focus on quality and valuations may mean the companies in the portfolio are better able to withstand a tough economic environment and emerge as long-term winners.

We would also note that the trust did not make substantial use of gearing in the financial year under review, nor has it done so in the intervening period. This means that the managers are in a good position moving forward if market volatility continues and buying opportunities present themselves. Moreover, the trust continues to trade at an attractive discount to NAV of c. 12%. We think there could be some downside protection from the board’s discount control policy, which considers buybacks if the trust trades at a discount in excess of 10%. The trust has repurchased 434,384 shares since the end of the reporting period. Looking through the current uncertainty, shareholders may gain from the combination of a recovery of European equites as and when the economic and political picture in Europe improves plus a narrowing of the discount.

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