A buying opportunity has opened up in the £400m JP Morgan Claverhouse Investment Trust due to its current 6.2 per cent discount, according to analyst at Numis Securities, who say it is a perfect core holding for UK equity income investors.
Following years of narrowing discounts in investment trust land, there was a change in trend earlier this year in the various UK sectors partly as a result of the imminent and very uncertain general election along with the FTSE 100’s toppy level.
At the time, the average discount in the IT UK Equity Income sector had widened out to 5 per cent while 21 out of 25 of portfolios within the sector were trading on wider discounts than their three-year averages.
This discount widening clearly affected performance, as UK equity income trusts were trailing their open-ended peers and the FTSE All Share between January and May.
Performance of trusts versus funds and index
Source: FE Analytics
Many viewed this as a buying opportunity given their valuations and the fact a number of closed-ended funds in the peer group have proved their ability to grow their investors’ income on a consistent basis.
Following the certainty of the election result, investors clearly picked up on this anomaly as the average trust in the sector is now trading on a slight 1.5 per cent discount while more than half of trusts in the sector are now trading on tighter discounts than their three year average.
However, JP Morgan Claverhouse – which is managed by William Meadon and Sarah Emly – has been left behind during this change in trend.
In fact, not only is its current 6.2 per cent discount to NAV the fourth widest in the sector, it means its shares are now cheaper from a discount point of view than they have been (on average) over the past one or three years.
Given the quality of the management team, the trust’s current holdings and its dividend history, the team at Numis says investors should considering buying in at these levels.
“We view JP Morgan Claverhouse as a core holding for investors looking for income from a diversified portfolio of large and mid-cap UK equities,” Numis said.
“Performance has been strong following a strategy review by the board in March 2012 that switched the focus to a more fundamentally-driven, higher conviction portfolio. The managers, William Meadon and Sarah Emly, use a bottom-up, stock picking approach with an emphasis on quality, momentum and value. Furthermore, the fund has an enviable track record of dividend growth and currently yields 3.4 per cent.”
“Despite this, Claverhouse’s discount [of 6.2 per cent] is wider than the peer group, and we believe it offers good value.”
The trust’s current investment approach was adopted when Meadon joined Emly as co-manager in February and the performance has picked up considerably as a result.
According to FE Analytics, JP Morgan Claverhouse has outperformed its average peer and beaten its FTSE All Share benchmark by close to 30 percentage points over that time with its returns of 66.66 per cent.
Performance of fund versus sector and index since Feb 2012
Source: FE Analytics
The closed-ended fund also outperformed both the sector and index in the differing market conditions of 2013 and 2014. However, its share price has struggled this year and its returns of 4.27 per cent in 2015 are less than those of the wider UK equity market.
Nevertheless, that lacklustre total return is predominately down its widening discount as, in straight NAV terms, JP Morgan Claverhouse is outperforming year-to-date.
Numis says the trust’s substantial exposure to the FTSE 100 (77 per cent, which is the highest in its sector) has weighed on returns given the blue-chip index’s underperformance relative to rallying mid and small-caps.
Nevertheless, they point out there have been winners within the portfolio.
“During the period the top performer was ITV, in which the fund has an overweight holding. It continued its track record of growing profits and increased its annual dividend by 34 per cent, as well as announcing a third consecutive year of special dividends.”
“The holding is now the biggest overweight versus the index and the managers believe it remains attractive in terms of its valuation and its ability to beat market expectations. Jupiter Fund Management also performed well, increasing its dividend and paying a special dividend.”
“Housebuilders and property-related stocks including Galliford Try, Taylor Wimpey and Berkeley Group all announced good results and benefited from positive sentiment towards domestic, cyclical stocks.”
Of course, however, given the trust’s weighting to the FTSE 100, there have been a number of disappointments within the portfolio – certainly relative to its peers.
“The biggest detractor from performance was the underweight position in BG Group, which received a takeover approach from Shell in April.”
“BG Group has been a zero holding for some time in the fund. Despite the significant premium paid by Shell over the prevailing share price, the company has still significantly underperformed the FTSE All Share over the last three years due to disappointing results.”
Performance of stock versus index in 2015
Source: FE Analytics
“Holdings such as Royal Dutch Shell and Rio Tinto also performed poorly due to softness in commodity prices, and the position in BHP Billiton was trimmed as a result.”
Numis points out that one of the most attractive features of JP Morgan Claverhouse is its expansive and successful dividend history. In fact, the trust’s board has increased its pay-out in each of the last 42 years making JP Morgan Claverhouse one of the AIC’s ‘dividend heroes’.
The chart below shows its more recent dividend history, which has increased from 10.95p per share in 2005 to 20p in 2014.
JP Morgan Claverhouse’s dividend history (pence per share)
Source: FE Analytics
The team at Numis expect that trend to continue given its revenue reserves represent 13 months’ dividends, the highest of the peer group.
“We believe Claverhouse’s dividend growth is sustainable. Revenue reserves represent 13 months of dividends, the highest of the peer group, while 2014 dividend cover was 117 per cent, ranking third highest.
“In addition, the Board has shown its commitment to dividend growth by using revenue reserves, if required.”
Given its past performance and progressive dividend policy Numis says investors should expect its current discount to narrow.
“Claverhouse’s discount to NAV has narrowed considerably since the change in approach.”
“We believe the fund’s reclassification has been positive for its rating as many of the Equity Income peer group trade on premiums. However, improved performance has also been a contributory factor. The board has authority to repurchase shares if the discount widens, although the last time they did so was in January 2012 when the discount widened to double figures.”
“The shares currently trade on a 6 per cent discount versus a 1 per cent discount for the peer group and we see potential for the differential to narrow.”
JP Morgan Claverhouse is geared at 14.4 per cent and has ongoing charges 0.68 per cent, but does charge a performance fee.
