Despite another year of outperformance for the JP Morgan American Investment Trust in S&P 500, some analysts have questioned whether recent changes to the trust are enough to keep it an attractive option for investors over the long term.
The £871m trust is the fourth oldest investment company, launched in 1881 when the US was considered an emerging market.
Much has changed since then, including the company's name and investment objectives which aim to achieve capital growth from North American investments by seeking to outperform the notoriously hard to beat S&P 500 index.
Last month it announced its end-of-year results which saw the trust outperform the benchmark in 2017 by more than 2 percentage points on a net asset value (NAV) basis, growing by 13.1 per cent overall.
However, once the discount effect is taken into account – it widened slightly from 3.1 per cent to 4.5 per cent – investors took home a total return of 11.2 per cent for the year, as the below chart shows.
Performance of trust vs sector & benchmark in 2017
Source: FE Analytics
Part of the outperformance of the trust was through its exposure to small-cap companies, which returned 29.4 per cent (in sterling terms).
The trust has been overseen by Garrett Fish since 2002 with Eytan Shapiro joining the trust in 2005 to manage the small-cap portion, which aims to balance the overall portfolio risk and enhance returns to shareholders over the long term.
During 2017 the fund made a few changes to the portfolio adding consumer discretionary and financials stocks, while trimming healthcare, telecom services and industrials companies.
As such, consumer staples is now the largest overweight sector followed by financials and consumer discretionary.
“We retain our underweight position in the industrials, real estate and materials sectors, as we are less excited about their long-term growth prospects and unappealing valuation levels relative to other sectors,” co-manager Fish said.
“Looking ahead, we do not see a material risk of a recession in the near term but continue to monitor a broad range of potential risks which could represent headwinds for US equity markets. 
“The passage of the tax reform act removed one risk from the market but investors will have to monitor how the implications of tax reform, trade policy, inflation and rising rates play out and respond in a flexible manner.”
The trust underwent a number of changes last year as the board and managers announced changes to the investment process.
As a result, the portfolio became slightly more concentrated, with a greater active share, and a more ruthless approach to underperforming investments.
This has resulted in the active share increasing from 67 to 70 per cent over the past year, while the number of large-cap holdings has fallen from 77 to 64.
Emma Bird, research analyst at Winterflood Investment Trusts – which includes the trust in its model portfolio – said JP Morgan American “provides core, mainstream exposure to US equities”.
She said: “We believe that the changes made to the investment approach last year, which resulted in an increased portfolio concentration, higher conviction in initiating positions and a stronger sell discipline, were positive developments, given the analysis of past performance,”
Bird added that the trust has the lowest ongoing charges ratio in the peer group at 0.47 per cent, which has benefited from a recent reduction of the management fee and the introduction of tiering.
Meanwhile, David Elliott, investment analyst at Investec Bank, said he is “relatively neutral” on the investment company at the moment despite the changes.
“They are moving in the right direction and increasing their concentration slightly and hopefully that continues to lower in my view,” he explained.
“The market has not been massively favourable for them, particularly last year with out and out growth leading the way but I think that more balanced approach going forward offers an interesting solution for a number of potential shareholders.”
Elliott said the trust may become more attractive for investors post-June when a large proportion of the investment company’s gearing – a debenture with a 6.875 per cent coupon – is repayable.
“They have talked about looking at various options for the refinancing and I think when that comes out it becomes a bit more compelling,” the analyst said.
However, not everyone is convinced that the trust has shown enough to prove that it can be a viable solution for long-term investors.
Alan Brierley and Ben Newell, analysts at Canaccord Genuity, placed a ‘sell’ rating on the investment company last month after the annual results were published.
“To be candid, while changes coming out of the review of the investment process were a step in the right direction, we find the increase in active share underwhelming,” the analysts noted.
“Last year, we highlighted how the US large-cap fund average was 75 per cent. The manager has significant depth of resource, with over 100 dedicated US professionals, but a relatively low active share seems to reflect a lack of conviction in this resource, and the investment process.”
And most concerning of all for the pair was that while the NAV total return was ahead of the benchmark in the last financial year, much of this was derived from the small-cap portfolio with little evidence of any improvement in returns from the large-cap portion.
This alarmed the analysts over the long-term sustainability of returns despite the fund being the best performer in the IT North America sector over the last decade and materially outperforming the S&P 500 since the two managers began working together on the fund.
Performance of trust vs sector and benchmark from 2005 to 2018
Source: FE Analytics
The analysts said: “The chairman highlights that the manager has delivered material outperformance of the benchmark over the 15 years of his tenure; the annualised NAV total return is 11.5 per cent versus 10.8 per cent for the S&P composite total return (net of withholding tax).
“However, while the first half of this period saw healthy outperformance of this most challenging of benchmarks, the relative performance peaked in 2011,” the pair added.
“Since then, notwithstanding a highly supportive environment, with positive contributions from gearing and share issuance/buybacks, the performance record has been dull.”
The trust has set a strategic level of gearing of 10 per cent (plus/minus 2 per cent) and is currently at 11 per cent according to data from the Association of Investment Companies (AIC).
Last October, it also announced the introduction of a tiered management fee with a performance fee of 10 per cent on any outperformance of the benchmark.
The lowering of the base management fee was welcomed by Brierley and Newell, however, having previously raised concerns.
“Given a low active share and tracking error, historically we have expressed concerned over an uncompetitive ongoing charge and so the reduction in base fee is a welcome development (although the company retains a performance fee); in a highly competitive environment, keeping a control on costs is important,” Brierley and Newell said.