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Annual results from JPMorgan Claverhouse as stock and sector selection drive outperformance

European Assets Trust is redomiciling to the UK

We have annual results (to end-December 2019) from the UK equity income company, JPMorgan Claverhouse (JCH). The company said that as at 16th March 2020 the FTSE All-Share Index had fallen to 2848.87; a fall of over 30% and its lowest level in almost eight years.

Chairman, Andrew Sutch, noted: “Although we report in this document on the 2019 financial year, it is clear that 2020 will be different and very challenging for the global economy and markets and thus for the company. Meanwhile, I can report a strong performance for the year to 31st December 2019, the company’s net asset total return being +25.3%. This compares with a total return for the same period from the company’s benchmark, the FTSE all-share index, of +19.1%, an excellent outperformance of +6.2%.”

Performance drivers

JCH delivered stock and sector selection of +6.4% against the benchmark.

William Meadon and Callum Abbot, managers of JCH, noted: “The JPMorgan Smaller Companies Investment Trust, managed by our in-house small companies team, performed extremely well over the period, returning 68% in share price terms. Over the years, this fund has not only contributed materially to the performance of Claverhouse, but as stocks have grown out of the smaller companies index and into the FTSE 350, it has also provided a rich source of many new ideas for us to invest in directly. Games Workshop and Dunelm are just two recent, very rewarding, examples of this process. JPMorgan Smaller Companies performed particularly well after the General Election as a combination of strong stock selection and a closing of the discount combined to give exceptional share price returns.

Our overweight position in Softcat, the IT reseller, materially contributed to returns. The company’s share price nearly doubled over the course of the year. The company has continued to gain share in a growing market and its strategy of selling deeper to existing customers has reaped benefits. We still believe there is significantly more to go for as companies in the UK continue to prioritise technology investment and Softcat is well placed to capture a greater share of this growing markets.

Intermediate Capital Group is an alternative asset manager that specialises in various types of niche credit and equity financing through private equity style funds. Fund performance has been consistently strong across their range, generating substantial performance fees and leading to considerable demand for new funds, which are charged at premium fees.

In 2019, homebuilders performed strongly, as the primary housing market remained robust and investors became more comfortable with the macro and political environment. Barratt Developments was the best performer. The management team set an ambitious margin target at the start of the year and has executed its strategy successfully throughout 2019. We think the company will continue to drive margins higher towards their target and the improved outlook for the UK economy should provide a further tailwind.”

Top contributors (LHS) and detractors (RHS) to performance vs FTSE all-share index

Investment Trust +2.01% Micro Focus (0.72%)
JD Sports +1.24% Evraz (0.55%)
Softcat +0.70% Imperial Brands (0.51%)
Intermediate Capital Group +0.69% International Consolidated Airlines (0.38%)
Barratt Developments +0.60% Royal Dutch Shell (0.35%)

Significant stock sales

William Meadon and Callum Abbot, went on to add.

  • “The Autumn saw us make our final sales of Fever-Tree. This stock has been a wonderful investment for Claverhouse over the years. Having first invested in 2015 at £4, the rapid rise in the share price over the ensuing four years enabled us to make many profitable partial sales along the way, some as high as £35. However, during 2019, we became increasingly concerned that growth of the company’s range of mixers was slowing in both the UK and Europe and that the success of its US expansion was as yet unproven. We therefore made final sales of the stock in September at £24. Such fears proved well founded as, post the period end, the company warned that its profits would not meet the market’s expectations. The stock fell sharply and is currently trading at £9.7, where we are assessing whether to invest once more;
  • We reduced our exposure to the oil sector during the year through some sales of both Royal Dutch Shell and BP. Both companies face significant headwinds from a falling oil price and the increasing demands put on them by society to reduce their carbon emissions. We sold out of the exploration and production company Tullow, after it announced a disappointing update on its Guyana oil fields. The mining company Glencore has substantial coal and oil assets which are rapidly falling out of favour as society becomes increasingly conscious of the impact they are having on the environment. This, together with the overhang of a US Department of Justice investigation into Glencore’s operations in the Democratic Republic of Congo, Nigeria and Venezuela, led us to sell our entire holding;
  • HSBC – we moved further underweight to this international banking group. In the second half of the year the company abandoned previously stated financial targets and announced a substantial restructuring of many of its businesses. The company is clearly struggling to cope with a backdrop of sustained low interest rates as well as heightened geo-political risks in its key Asian markets, especially Hong Kong;
  • Reckitt Benckiser – this global household goods and health products business has been struck down by a series of ailments which has led us to exit our already underweight holding. We think that the new CEO has his work cut out to return the group to meaningful volume growth and there is a danger that the margins may be sacrificed to achieve this;
  • Burford – we exited our off-benchmark position in this litigation finance specialist. As the litigation finance market becomes more crowded, our concerns grew over the sustainability of the high returns on capital. This proved prescient as, later in the year, the stock fell sharply as more investors started to share our concerns;
  • We sold out of our position in ITV, the British TV producer. Netflix, Amazon and now Apple (to name just a few) have entered the production space with much higher budgets and we struggle to see how ITV’s latest venture, Britbox, can successfully compete with such deep pocketed behemoths; and
  • Vodafone – we sold our remaining small holding as we do not think a dividend cut is enough to turn the tide in an industry where price wars are a constant feature. Even post the dividend cut, debt levels remain uncomfortably high.”

Market Outlook

The managers noted: “The decisive result of the recent general election has removed much of the political uncertainty that has hung for over both the UK economy and stock market in recent years. Whilst the precise timeline for delivering a complete Brexit (including attendant trade deals) will remain unclear for some while yet, we nevertheless expect the clearing of the political skies soon to improve the confidence of consumers, corporates and investors alike.

With such a substantial majority in the Commons, the Government can enact policy at will and it would not surprise us if much of it was radical in nature and rewarding for UK shareholders. Such policies should also attract overseas investors back to the UK economy and stock market. What is more, despite a strong performance in 2019, UK equities still look very good value, trading at a 35% discount to the MSCI world index – a near 30 year record. Moreover, the prospective yield on the FTSE all-share looks particularly appealing relative to both other equity markets and also the pitifully low yield on bonds and cash deposits.

The global economy remains in reasonable shape and should be supported further by the recent signing of the first stage of the US/China trade deal. The US economy may slow a little in 2020 but it is unlikely to go into recession. This together with continuing low interest rates keeps us optimistic on the prospects for markets in the medium term.

However, an improving economic and political backdrop has been completely overshadowed since the year end by the rapid spread of coronavirus from its origins in China. This virulent virus, which is moving at pace across the globe, is understandably causing concern amongst both investors and general public alike. Against a backdrop of considerable uncertainty as to how potentially dangerous the virus is and how far it will spread, equity markets globally have fallen sharply. Sentiment is likely to remain risk averse until such fears dissipate, which may be some while. As a consequence, we have tactically reduced the gearing in the portfolio to lower levels than usual, but we will be looking to increase it when appropriate.

Meanwhile, as markets oscillate, JCH’s shareholders can continue to take considerable comfort from being invested in a company with fortress revenue reserves which provide them with one of the most secure dividends in the UK stock market.

The fund currently has no gearing.”

JCH: Annual results from JPMorgan Claverhouse as stock and sector selection drive outperformance

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