Value bias weighs on JPMorgan European – For the year ended 31 March 2020, JPMorgan European Investment Trust returned -14.6% on its growth shares and -25.7% on its income shares, both in NAV terms. The actual returns to shareholders were -16.3% and -27.5%, respectively. These compare to a return of -8.3% on the MSCI Europe ex UK Index. The chairman says that the ‘value’ style that the manager uses to select shares has been out of favour.
The dividend on the growth shares was maintained at 8.85p. This was covered by earnings of 8.77p. Holders of the income shares get quarterly dividends. These totalled 6.7p for the year to the end of March, up from 6.25p for the prior year. Some of this year’s dividend had to be paid out of reserves as earnings amounted to 6.25p.
[This represents quite significant underperformance over the year. The individual stocks that contributed to this are discussed by the managers below. As the chairman says, the main reason was the management style. The managers draw attention to the widening gap between value stocks and growth stocks, which is as wide as it was in the TMT bubble 20 years ago. Amongst the value sectors of the market that have lagged in performance are energy, financials and real estate. Some of this is not just sentiment driven but reflects a reality of renewables driving down energy prices, fintech and regulation eating into bank margins, and shifts in purchasing patterns weighing on retail property (and maybe now working from home, hitting offices). These represent a permanent reduction in value and this limits the ability of value stocks to return to previous long-run valuation levels. This does not mean that these funds won’t see better days, however.]
Performance drivers
For the growth portfolio: “…some of the most successful holdings were in the healthcare sector. Despite correcting sharply in the Covid-19 sell off, Roche’s share price ended the year up 26% as the market started to appreciate its new product launches and strong pipeline, while coming to terms with the ongoing threat to its oncology portfolio from biosimilars. Although it is too early to quantify the outcome the news that Actemra, a drug for treating rheumatoid arthritis, had entered Phase 3 trials for Covid-19 pneumonia gave further support to the share price. At the opposite end of the market cap spectrum Eckert & Ziegler operates in the radiopharmaceutical industry specializing in, for example, producing radio isotopes for prostate seed implants. Expectation of strong earnings growth led to the share price rising more than 90% during the year.
Technology stocks continued to perform well. The growth portfolio benefitted in particular from buying Teamviewer when it came to the market in September. The company specialises in global connectivity platforms and has seen demand for its technology accelerate during the lockdown period faster than was expected at the launch of its IPO. The stock was up more than 40% in the year under review and at the time of writing had appreciated 75%.
The severe correction caused by the Covid-19 pandemic hit the growth portfolio’s holdings in cyclically sensitive companies. Airbus, which makes aeroplanes, saw demand for new planes virtually disappear as fleets were grounded around the world. Safran which makes aircraft engines and other systems fared little better despite its aftermarket and service business which should have been more defensive. The stocks fell 48% and 32% respectively. Anything auto or construction related was hit as badly with investors having no visibility on the severity or length of the global recession. For example Peugeot declined more than 40% and Heidelbergcement 36%.”
For the income portfolio: “…the headwind of not owning or being underweight some of the mega-cap defensive stocks that did not yield enough to merit inclusion in the portfolio was highly detrimental to performance in the period under review. The worst offenders were Roche and Novo Nordisk in the pharmaceutical sector, Nestle, and ASML in the technology space. Taken together they accounted for 3.4% of the underperformance.
Holdings in the income portfolio that did well included Iberdrola, a Spanish electric utility, and Fjordkraft, a Norwegian electricity generator and distributor, which benefitted from declining interest rates, as did Elisa the Finnish Telecom company which rose 50% over the year. Elsewhere Galenica, a Swiss pharmaceutical retailer, saw analysts continually raise their earnings estimates throughout the year before extra demand from customers stockpiling as the Covid-19 virus took hold in February and March. The share price rose 50% over the year.”
JETG / JETI : Value bias weighs on JPMorgan European