Results analysis: JPMorgan Global Growth & Income

• JPMorgan Global Growth & Income (JGGI) has reported its full year results for the year end 30 June 2021. JGGI continues to operate with its policy of paying out 4% of NAV as a dividend, using the NAV at the end of the preceding financial year. This led to JGGI paying a full year dividend of 13.16p per share for FY 2021, a 1% increase on the prior payout. The board expects to pay a dividend of 16.96p for the next financial year, which will be a 28.9% increase on the recent payout.
• JGGI reported a NAV total return of 32.3% over its 2021 financial year, and a return of 33.0% in share price terms, outperforming its benchmark, the MSCI ACWI Index, which returned 24.6%. JGGI’s performance has come almost entirely through stock selection, whereby the team have been able to successfully navigate the COVID-19 driven markets, rotating into cyclical stocks as the market began to price in the post-pandemic recovery.
• The team highlight both the performance of the trust’s high-quality holdings during the initial phase of the pandemic, as well as its more cyclical holdings during the latter parts of 2020 and early 2021, after they had purchased cyclical companies such as Lyft and American Express. The recovery in cyclical stocks has been so strong that the team have already begun to trim their holdings and are now aiming to position around the ‘reopening’ winners: high-quality companies whose share prices still remain temporarily depressed by the pandemic.
• There have been a number of operational changes to the trust over the 2021 financial year, including the issuance of a £20m 15-year fixed rate note and the adjustments which have been made to JGGI’s investment policy in order to give its managers more flexibility.
• While 2021 will be the last year for JGGI’s current chairman, Nigel Wightman, he remains positive on the outlook for JGGI: “As I retire, I believe that the future of the company is bright. As ever, the global economy faces significant challenges. … However, our investment managers have demonstrated their ability to rise to every challenge and I expect them to continue to be able to identify successful companies in an environment that will be constantly evolving.”

Kepler View

JPMorgan Global Growth & Income (JGGI) offers investors a portfolio of high-quality global equities, with the policy of paying out 4% of its NAV each year as a dividend, based on its net asset value at the end of each financial year, ending 30 June.

Since adopting its current dividend policy in 2016, JGGI has been able to offer investors the combination of a high yield combined with a portfolio of quality-growth companies which are not typically associated with an equity income strategy. JGGI has been able to pay a full year dividend of 13.16p per share, a 1% increase on its prior pay-out. Yet given JGGI’s recent strong performance, the board expects to pay a dividend of 16.96p for the next financial year, which will be a 28.9% increase on the recent pay-out. JGGI yielded 3.8% as of its financial year end, with its yield having been compressed slightly due to its strong NAV performance over the year.

The board’s expectation regarding the pay-out is a reflection of its strong performance over its 2021 financial year, during which it generated a NAV total return of 32.3% and a share price return of 33.0%, easily outperforming its benchmark, the MSCI ACWI Index, which returned 24.6%. Similar results can be seen over a longer time frame as well, with JGGI having outperformed the MSCI ACWI since the start of 2020, with a NAV total return of 39.1%, compared to the 26.9% of its benchmark as at 28/09/2021.

We remind readers that JGGI’s defined structure frees it from the need to purchase the typically high-yielding companies, such as banks and energy companies, which have underperformed their low-yielding peers in recent years. JGGI’s flexibility led it to be the best performing trust in the AIC Global Equity Income sector over the course of its financial year to 30 June 2021. The trust’s relatively idiosyncratic portfolio, when compared to more conventional equity income strategies, also allows it to offer income investors a strong source of diversification, offering investors access to high-growth names their income requirement would typically prevent them from holding, a fact which is reflected in JGGI’s 3.7% premium, the highest in the sector, as at 30 September 2021.

JGGI’s 12-month performance has been almost entirely driven by stock selection, contributing 8.4% to its outperformance. This was largely the result of the team holding high quality companies during the pandemic, including a number of media and technology stocks, the COVID-19 ‘winners’, combined with their subsequent rotation into cyclical names during mid-2020, in order to capitalise on the eventual economic rebound. The team highlight their holdings in Lyft, the US ride hailing company, and American Express, the multinational financial firm, as examples of their successful rotation into cyclical stocks. Both companies saw a strong increase in their recent prospects thanks to the reopening of economies and the recommencement of economic activity.

The team’s long-term holdings in semiconductors and mega-cap tech also enhanced the trust’s returns over the period. Semiconductors continue to benefit from the surge in demand and bottlenecks in production. The team have yet to find evidence of inflated demand however and have added additional semiconductor firms to the portfolio over the year to diversify its exposure to the sector. In the case of mega-cap technology, JGGI’s largest stock positions, the team’s holding of Alphabet, was a significant contributor to JGGI’s 2021 FY returns, thanks to the increasing strength of the advertising, media and cloud computing services. This was also a key differentiator from its peer group given the low yield of the stock.

The team remain cautious around potential value risks within the global economy, which could be brought to a head due to potential increases in inflation and higher interest rates, as the economy has moved from ‘recovery’ to ‘mid-cycle’, a period often characterised by higher prices. They are currently avoiding the expensive growth names as a result, particularly US software companies, and remain cautious around the use of gearing, due to near term valuation risks.

During the year, the board have also made changes to JGGI’s investment policy, increasing the potential weighting the top ten holdings can make up to 45%, and up to 65% for the top 20, in order to allow the managers more freedom, which we think should provide the potential for outperformance, especially given the success of their stock-picking in the past. 2021 will also be the last year for JGGI’s current chairman, Nigel Wightman, who will be replaced by Tristan Hillgarth at the October AGM.

In our view, JGGI’s 2021 financial year is a prime demonstration of the benefits its dividend policy provides. Not only has it easily beaten its benchmark, but it was also the best performing global equity income trust over the period. JGGI continues to offer income investors not only a strong source of income, but also the attractive ability to access the high-quality growth opportunities, something which, with hindsight, was key in effectively navigating the various phases of the pandemic-driven markets.

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