JPMorgan American lags benchmark in 2018 (underscoring why the board asked for changes to the management line-up) – for 2018 it reported a NAV return of 0.6% against a 1.3% return on the S&P 500 Index. The return to shareholders was -0.2%. A total dividend of 6.5p per share compares with last year’s total of 5.5p per share, representing an increase of 18.2%.
Change in fees
Alongside the proposed changes in investment process, the board has negotiated an amendment to the current fees paid to the manager. The performance fee element of the fee is being removed, backdated to 1st January 2019. The manager has agreed to waive its management fee for a period of nine months commencing on 1st June 2019 (which the chairman says is about equal to the underperformance arising from the company’s old performance fee arrangement. Thereafter, the management fee will resume, charged at the current rate of 0.35% on the first GBP500 million of net assets; 0.30% on net assets above GBP500 million and up to GBP1 billion; and 0.25% on any net assets above GBP1 billion. The manager will also bear the costs associated with the reorganisation of the portfolio.
Extract from the manager’s report
“2018 was not a supportive investment environment for our strategy, unlike 2017 when the company outperformed the S&P 500 Index. The large companies’ portfolio posted a positive return but underperformed the benchmark over the year. This underperformance was mainly driven by unrewarded stock selection within the Financials, Consumer Discretionary and Healthcare sectors.
Within Financials, our overweight position in insurer AIG was among the largest detractors in the sector. Shares of AIG detracted due to pre-tax catastrophe losses from Typhoons Jebi and Trami in Japan, along with Hurricane Florence in the US and revisions to previous losses for California mudslides in the US. These losses were substantially higher than AIG’s market exposure would otherwise have suggested.
Within the Consumer Discretionary sector, our underweight position in Amazon hurt relative returns over the period. The stock demonstrated its resilience and significantly outperformed the market, as its increased focus on profit led to earnings growth, boosting investor confidence. Amazon has leadership positions in e-commerce and cloud computing, as well as a flourishing, high margin advertising business and long-term profit potential from international markets.
Among individual names, not owning Pfizer in the Healthcare sector also weighed on performance. Pfizer delivered solid financial performance in 2018 and developed a new commercial structure that is expected deliver higher revenue growth and drive its future success. On the other hand, the portfolio benefitted from strong stock selection in the Communication Services and Energy sectors.
Within Communications Services, our overweight in Walt Disney was among the top contributors. The stock outperformed on the back of excitement over its forthcoming streaming service, Disney+, which should be launching in 2019. Disney’s acquisition of Twenty First Century Fox also added to its strong films and content base. Going forward, we believe Disney has the best collection of traditional media assets and the greatest scale, which gives it a high probability of success in the growing streaming market.
Furthermore, within the Energy sector, our overweight position in the multinational ConocoPhillips and our lack of exposure to Schlumberger both proved beneficial. ConocoPhillips’ strategy of prioritising debt reduction and capital efficiency over growth resonated well with investors while more growth-focused names underperformed. As for Schlumberger, a less favourable outlook for project backlogs was compounded by unfavourable contract terms and weakening pricing, which the company and other service peers were forced to accept in order to maintain utilisation rates.
Among individual names, our overweight in the Information Technology giant Microsoft was among the largest contributors. The stock consistently outperformed the Index. The company’s cloud computing business, consisting of Office 365 and Azure, is taking advantage of companies shifting their workloads to the cloud, in order to drive up productivity and revenue growth. We continue to be positive on Microsoft as we believe it is well positioned to benefit from the continued transition to cloud computing, which has huge momentum. Our overweight holding in health insurance company Humana also proved particularly beneficial. The company reported positive earnings results throughout the year which led the stock to trade higher.”
JAM : JPMorgan American lags benchmark in 2018