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Buy, hold or fold: JP Morgan Global Growth & Income shifts to equity income sector

07 February 2017

A new dividend policy means JP Morgan Global Growth & Income is offering something different. FE Trustnet finds out what the experts think of the change.

By Jonathan Jones,

Reporter, FE Trustnet

Six months on from its decision to change strategy towards an income paying trust, JP Morgan Global Growth & Income has seen a surge of interest with its discount reducing from 14.8 per cent to 5.6 per cent but are investors jumping the gun without a track record for the new strategy?

In July, the investment company rebranded and adopted a new distribution policy which means it will provide a target dividend will be set each financial year equivalent to at least 4 per cent of the new asset value (NAV) as at the end of the preceding financial year.

This will be paid quarterly in October, January, April and July over the next financial year.

At the time, the investment trust’s board said the move would “widen the appeal” to investors looking for income.

Significantly, however, nothing has changed to the investment process, so the underlying investment team and process which is based on fundamental stock selection, bottom-up remains entirely unchanged.

This could be welcome news for investors, as the trust has been a consistently top quartile performer in the IT Global sector over one, three and 10 years and is second quartile over five years – though these figures include a strong six-month period after the change to the equity income sector.

Performance of trust vs sector and previous benchmark over

 

Source: FE Analytics

Jeroen Huysinga, manager of the trust, said: “Despite the fact that we are going to yield 4 per cent or currently just under 4 per cent, I have no compulsion to buy high yield stocks.

“In fact high yielding stocks [rose] certainly at the end of June last year – and still are really expensive within the universe of stocks that we cover. They are the antithesis on where we stand with this portfolio at the moment.”

Currently, the underlying dividend yield of the strategy is returning around 1.7 to 1.8 per cent, he says, meaning the remainder will be paid out from capital.

Charles Cade, head of investment companies research at Numis Securities, said: “We can understand the rationale for JP Morgan Global Growth & Income (JPGI) seeking to enhance its income.


“The fund (£340m market cap) is relatively small compared to the Global Growth peer group, which has seven funds with market caps over £1bn.

“In our view, however, it is questionable whether JPGI should be reclassified as an equity income fund simply because it pays an enhanced distribution from capital.”

Marten & Co head of research James Carthew agrees, noting that its performance against the Global Equity Income sector is skewed due to its vastly different investment approach.

“Within its peer group, because it’s had a completely different style to the rest of the group for a very long time it has got a completely different performance record so on the face of it, it is the best performing fund in its sector by miles over most time periods,” he said.

Indeed, the trust has outperformed the IT Global Equity Income sector and the best performer within it – Murray International Trust – over the last decade.

Performance of fund vs Murray International Trust and IT Global Equity Income sector

 

Source: FE Analytics

“You’re not comparing apples with apples,” Carthew said.

“A fund that is generating its income from dividends will always have a lot more stable capital than those paying out of capital but if you can consistently generate capital growth to cover the dividend and some extra then at the end you’re going to do better.

“[Therefore] there will be periods where this fund will not perform like the peer group and at the moment performance looks marvellous but there may be extended periods where it underperforms just because of the nature of how these things work.”

Numis’ Cade added: “The impact on capital returns of paying an enhanced yield is disguised in rising markets, but NAV losses will be accentuated when markets fall.


“Nevertheless, we accept that enhancing a fund’s yield can increase its appeal with investors in the current environment.

“Reflecting this, the fund was trading on a 14.8 per cent discount before the distribution policy was announced, which has since narrowed to 5.6 per cent.”

This significant shrinking of the discount led Marten & Co’s Carthew to suggest the fund is bucking the trend of those paying dividends out of capital, a trend which has become increasingly popular in recent years.

“It’s a tricky thing because for a long time I have been pretty dubious about trusts that pay dividends out of income and it did seem for a long time as though investors weren’t really pigeon holing them as income funds even though they were ostensibly paying high yields.

“[However JP Morgan Global Growth & Income] does seem as though this is bucking the trend at the moment.”

As such, he says investors should give the manager the benefit of the doubt given his long term history, but that they should “recognise that it is a very different animal to the rest of the peer group.”

Winterflood Investment Trusts head of research Simon Elliott has kept the fund – a corporate broking client of parent Winterflood Securities – on his latest recommended list.

He said: “JPM Global Growth & Income has a well‐defined investment process, which benefits from the significant resources of JP Morgan Asset Management.

“The fund is trading on a discount of 7 per cent, which is notably wider than the Global Equity Income peer group average of 1 per cent.”

“Although the fund’s discount has tightened since the new dividend policy was introduced, we believe that once payments are made under the new policy there could be further tightening.

“We therefore believe that the current discount offers value, with downside discount risk limited by the board’s aim of maintaining an average discount of around 5 per cent.”

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