JPMorgan American reports first results since new managers and strategy change – JPMorgan American has reported half-year results this morning; in the six months to 30th June 2019, the total NAV return in sterling terms was 15.3%. The discount narrowed slightly over the period as the shares slightly outperformed NAV. The total share price return was lower than the benchmark S&P 500 index, however, which was up 18.4% in sterling terms.
Earlier in March, we wrote on the changes the fund was making to its investment strategy (click here to read this story). Over the half-year period, JAM began the process of transitioning the portfolio to comply with the company’s new investment strategy at the end of May. By early June, the new higher conviction portfolio was in place, with the number of stocks in the large-cap portfolio reducing to 40 stocks.
New managers discuss performance attribution
What follows are a few highlights from Timothy Parton and Jonathan Simon’s (the new managers) report section, discussing the attribution of results: “Given the market concerns at this stage in the cycle, the company did not deploy gearing during the period. With the rising market environment in the first six months of 2019, this decision saw us forego the opportunity to earn higher returns.
Looking at relative performance, our stock selection proved challenging during the period with our stock selection in the information technology and energy sectors generating the strongest headwinds to relative performance.
Within the information technology sector, our lack of exposure to MasterCard for some of the period under review featured among the largest detractors. The company’s shares rallied during the period after they reported quarterly results that were better than expected and marked by continued resilient underlying volume growth. Given the long term shift from cash to cards and digital payments, high incremental margins, and the long term opportunity in business (B2B) payments, we have now initiated a position in this stock, finishing the period with an overweight allocation.
With regards to the energy sector, our exposure to Conoco Phillips and Marathon Petroleum also detracted from performance during the period. Conoco Phillips’ share price traded lower and as we expect an increase in capital expenditure after 2020 to reduce the free cash flow, which might result in lower growth, we sold out of our position in the company. As for Marathon Petroleum, the stock fell due to real and perceived problems in integrating the Andeavor business it acquired in 2018. However, we continue to hold the stock, reflecting our positive view on the company’s large-scale, complex refining and logistics systems.
At the individual stock level, our overweight in the consumer staples name Walgreens Boots Alliance (Walgreens) was the largest detractor. Facing pressures on both its retail and medical reimbursement businesses, the company missed consensus estimates. While pressures associated with the changing landscape in both of these market segments are likely to persist, and management has been caught somewhat off-guard, we do not see much downside from here. Despite the controversy in the marketplace, we think a slimmed down version of Walgreens consisting of pharmacy, health, beauty and wellness, and some convenience can work.
Within consumer discretionary, our position in Chipotle Mexican Grill proved beneficial. The company reported strong quarterly earnings reflecting higher comparable sales and better-than-expected margins. We sold the position following this good news as we believe any future incremental margin improvement would be difficult to achieve.
Despite the weakened contribution from our holdings in information technology, the top contributor to the portfolio’s performance at the security level was our overweight position in Microsoft. The company reported solid earnings, raised future earnings guidance and appears to be firing on all cylinders.”
Tricky balance between strong corporate sector and growing macro and political risk profile
Dr. Kevin Carter, chairman of JAM, discussed the fund’s outlook, at this late stage of the economic cycle:“The length of this economic expansion coupled with an inverted interest rate yield curve in which short rates are higher than longer term rates, suggests at least a material slowdown or possible recession lie ahead. Presumably this is what the Federal Reserve is now weighing more highly in its policy outlook, along with lingering global trade issues, and some festering geopolitical concerns.
Stock market investors need to balance the still healthy corporate sector with these time honoured signals for caution. The board is hopeful that the new investment approach of selecting a more concentrated portfolio of first rate value and growth companies will be resilient in the developing market environment, while having the potential for attractive returns over the medium term.”
JAM: JPMorgan American reports first results since new managers and strategy change
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