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Alan Ray
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Updated 29 Nov 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.

  • For the six months to 30/09/2022 JPMorgan European Growth & Income produced a NAV total return of -9.4% (debt at par value) and -7.7% (debt at fair value). The share price total return was -9.7%. This is in comparison to the benchmark, which produced a total return of -10.5%.  The Morningstar Europe investment trust peer group recorded share price and NAV total returns of -16.3% and -7.9% respectively, with debt at fair value. This is the first six-month reporting period under JEGI’s new simplified structure, where there is a single share class invested into one equity portfolio and with one dividend policy.
  • Stock selection was the main reason for outperformance against the benchmark. Pharmaceutical stock Novo Nordisk was a key performer, the share price performing well in anticipation of key milestones in its obesity/diabetes franchise. Renewable energy company Acciona Energies Renewables was also a key performer, being well positioned to double its gross renewable energy capacity by 2025.
  • The managers have continued to add to defensive positions in areas such as Pharmaceuticals and Food, as well as taking some positions in value stocks such as Italian bank Unicredit, which should perform well with higher interest rates. Overall, the portfolio is relatively defensively positioned and has a lower valuation than the average for the benchmark, while having better quality and momentum characteristics.
  • The discount at the half-year was 16.0% compared to the average discount for the board’s chosen peer group of six companies of 13.1%. At 23/11/2022, the discount was 10.4%, compared to the same peer group at 8.3%.
  • The board does not wish to see the discount widen beyond 10% under normal market conditions. In the period under review, 300,000 ordinary shares were bought back for cancellation and 1,164,567 ordinary shares were bought into treasury. Post period end, a further 411,042 ordinary shares were bought into treasury.
  • The newly simplified structure was designed to provide shareholders with a dividend based on 4% of the preceding year NAV payable in July, October, January and March. The company has paid the first interim dividend of 1 pence per share and declared the second interim dividend of 1 pence per share. Between the end of this six-month reporting period and the release of this report, the board declared a third interim dividend of 1 pence per share. The board is expecting to declare the fourth interim dividend in February 2023.
  • Chair Rita Dhut said: “your Board has confidence that our fund managers have the requisite experience to navigate such a tricky environment by continuing to stick to a proven investment process. The new 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. Together that provides some assurance to shareholders in these uncertain times.”

Kepler View

It is obviously only early days for JPMorgan European Growth & Income (JEGI’s) new simplified structure, and no one would have wished for the backdrop that accompanied this first reporting period. Nevertheless, it is encouraging that stock selection has added value against the benchmark even in the midst of a very difficult equity market. The new structure frees the management team to concentrate on stock selection without having to worry about the timing of underlying dividends, and this has paid off in the first six months.

The manager has sensibly kept net gearing to a minimal 3.2% and the board has used share buy backs in a controlled manner. It is an inexact science using share buy backs to control discounts, particularly in difficult market conditions, but shareholders do of course receive a small enhancement to net asset value as a result of shares repurchased at a discount to net asset value.

The new dividend policy mirrors one adopted by several other investment trusts including some of the JPMorgan Asset Management range. Since the dividend is set as 4% of the preceding financial year end’s NAV per share, it is very easy for investors to see what the quarterly dividends for the following year will be. It is worth just noting though that although the current year dividend total of 4 pence per share would imply, based on the current share price, a yield of 4.6%, the dividend level will be reset once again to 4% of NAV measured at 31/03/2023 and so investors should be aware that the dividend rises and falls with the NAV. This is different to traditional dividend policies but could in our view provide a very useful diversification in an income portfolio, as it is not normally possible to gain exposure to more growth-orientated European equities while at the same time receiving an income. Income-seeking fund investors can find that the equity funds they own are concentrated on a few stocks and sectors with a long history of dividend paying, and the opportunity to diversify into different sectors, stocks and geographies is a welcome one.

JEGI’s current discount is slightly wider than the average for the peer group and in our view could improve as more investors become aware of its robust performance and newly-simplified structure and dividend policy. After a very difficult year for equities generally, we would expect the market to favour low valuations and more robust growth companies. JEGI’s defensive positioning means it is very well set to benefit from such a scenario.

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