JPMorgan Global Growth & Income (JGGI) has announced its annual results for the year ended 30 June 2020, during which stock selection drove the company’s outperformance of its benchmark. During the year, JGGI provided an NAV total return of +6.0%, outperforming its benchmark, the MSCI AC World Index expressed in sterling terms, which returned +5.2%. JGGI’s share price total was slightly lower at +4.8% reflecting a narrowing of the share price premium to NAV.
Investment manager’s comments – Portfolio Review and Spotlight on Stocks
We had been cautious for some time on a number of sectors that we felt were pricing too optimistic an economic outlook (even before we’d heard the term COVID-19). Cyclical consumer and commodity companies are good examples of where we chose to have virtually no positions. Even within banks, we were focussing on the high quality names in the US, rather than the more challenged Europeans. All of these positions worked in our favour over the 12 month review period, as these sectors meaningfully underperformed. In contrast, our sizeable positions in the retail and health services sectors were some of the strongest contributors.
As always, not all sectors can contribute positively. Our positions in aerospace and beverage names were severely punished when the pandemic hit. The absence of the consumer traveling or eating out created unprecedented challenges, and the companies we owned in these sectors were not immune.
Airbus and Safran are two examples of how painful the aerospace sector was for us. These stocks both fell by 65% in just over a month, as the market feared that airlines would go bankrupt, passengers would no longer travel as frequently, and ultimately these companies would be significantly impaired. We decided to consolidate our positions into Safran, as their large aftermarket business will continue to provide significant cash flow even in the event that air travel remains depressed for a number of years. Unfortunately Airbus was a name that we saw as carrying too much risk, and we felt we could find better investments elsewhere.
Another sector that has been through a torrid few months is the energy sector. Whilst we had limited our holdings in this sector, unfortunately the names that we owned performed very poorly. Diamondback Energy was the worst of them, as a perfect storm of a collapse in global demand for oil due to the virus, and a confrontation between Saudi Arabia and Russia on their OPEC+ agreement, led to Brent falling from $69 a barrel in January, to just $19 in April. With no levers to pull other than cutting production, Diamondback took a significant hit. We felt that these smaller companies operating in West Texas faced a real existential crisis, and as a result we chose to consolidate our holdings into the larger oil conglomerates, that will both benefit from an oil price recovery, but are also making significant investments in more sustainable energy sources.
One company it is important to mention is Apple. Apple is not a name we have owned for much of this year, and whilst that may appear to have been a flawed decision, it is important to frame the context. Within the Technology sector, we see companies that are significantly more attractive than Apple. That is not to say that we think Apple is a bad company – far from it. But when we are selecting the best names for the next 3-5 years, we simply see more opportunity elsewhere.
One such name is ASML. They have a virtual monopoly in cutting-edge lithography machines – machines that are used in the production of chips. Their Extreme Ultra-Violet (EUV) machines are vital for those chip manufacturers who operate at the leading-edge. Without ASML’s technology, the pace of innovation in the electronics industry would simply not be possible. We have confidence in the outlook for ASML for at least the next 5 years, and even though the stock has been one of our best performers, we continue to own a large position.
The stock that contributed most to our outperformance in the past 12 months is Schneider Electric, which has truly been a reminder of how strong the investment case has become. The consistency strategy of positioning themselves in Energy Management and Industrial Automation is still in the early stages of bearing fruit. The business of providing solutions that allow factories to become more energy efficient and more automated is one that we believe will continue to grow for many years, with Schneider leading the way. The EU Green Deal should also allow them to further accelerate growth, particularly in Energy Management.
Morgan Stanley is a name that demonstrates how important selecting the right stocks is. In an environment where the Global Banks Index fell by 21% over the course of 12 months, Morgan Stanley rose 10%. Their strong performance in Wealth Management, despite very difficult markets, was impressive, and we continue to like the prospects here as they look to integrate E-Trade into the business. Their trading business was stellar, as they grew Fixed Income, Currencies & Commodities (FICC) trading by 168% in the most recent quarter, and their Investment Bank continued to excel. They continue to make progress towards their return targets, and we have confidence that management will continue to execute.
One final name to mention is Amazon, which of course is a major beneficiary of the pandemic. At the time of writing, the stock has nearly doubled from lows back in March, and it is undeniable that the last few months have led to yet another step change in their trajectory. Their AWS public cloud business is perhaps less well known than the Retail business, but it is a $40 billion revenue business growing at 33% – a truly amazing number for a business that size. With consumers stuck at home, online ordering became more vital, and Amazon will benefit long into the future from the increased number of people with Prime, and the forever-changed shopping habits in areas like Grocery. Given the fantastic performance, we have trimmed our position in this name, but it remains a core holding.
In similar fashion to the last financial year, we increased our weighting in both the US and in Continental Europe, ultimately driven by our stock selection, rather than any macroeconomic view. During the volatility in the early parts of 2020, we found ourselves looking for high quality businesses that were trading at meaningful discounts to what we felt they were worth, and the US has an abundance of quality companies. One such example is our purchase of American Express, which we consider very well positioned to continue to grow for many years, but was performing very poorly as the market worried about the short-term dynamics of consumer spending on travel. These types of opportunities will drive the geographical shape of the portfolio, rather than any kind of asset allocation.
Investment manager’s comments – Outlook and Portfolio Positioning
Towards the end of 2019, we took gearing down to zero, as we had real concerns about valuations, and the phase of the business cycle. That proved to be the right decision, albeit for reasons we couldn’t have predicted. We have not yet meaningfully increased the gearing, but we have increased overall risk in the portfolio, starting in April, through the purchase of a number of more cyclical names. Our reasons for not yet utilising the gearing facility is rooted in the risks that we still see ahead. We do not yet know what the state of the world will be when enhanced unemployment schemes disappear, or when Central Banks are unwilling to provide a further backstop to markets. If markets were at cheap valuation with those uncertainties ahead, we might make a calculated decision about the risk we take, but with markets having rebounded strongly, we await a better opportunity to add gearing.
The biggest single uncertainty of course is the resurgence of COVID-19, and the timeline to delivering a vaccine. We are hopeful that the vast amounts of money currently focused on finding a vaccine will be successful, and in the meantime must rely on governments to support their citizens. The trajectory of job losses is hard to forecast, but we suspect that once furlough schemes end, we do see another step up in unemployment. However this crisis does not resemble the Global Financial Crisis – we do not see existential threats to the financial systems we rely on. Instead we have experienced a shock, and as a result we are at the beginning of a new business cycle. Be prepared for volatility in the next few months, but be confident in the outlook.
With that in mind, we have added to a number of cyclical names at very attractive prices. One such example is Taylor Wimpey, the UK homebuilder, who recently took advantage of weak land prices in the UK to improve their land bank at attractive levels. Housing demand in the UK will continue to grow, and this is a sensible strategic decision by management. With the shares trading at levels not seen since the aftermath of the Brexit vote, we have initiated a position in the stock. Another consumer cyclical that we purchased was Booking.com – the leading online travel agent. It will not surprise you to hear that the complete shutdown of travel had a devastating impact on hotel bookings, but thankfully Booking.com went into the crisis with a very strong balance sheet. We are confident that the structural forces in place before the crisis, namely the continuing move online of hotel bookings, will prove to be supportive, and we took advantage of the panic in markets to buy the stock. Having started the year with no exposure to consumer cyclicals, we envisage our exposure continuing to grow.
The same can be said of our exposure to other sectors and stocks that look cheap versus their intrinsic value. Medical device companies were hit hard as hospitals halted elective procedures, but those procedures will happen in time. Semiconductor stocks that are vital to the move to Electric Vehicles sold off early in the crisis, yet their strategic positioning has never been better. Chemical companies that saw demand collapse, but have now seen it bounce back. All of these were opportunities that we grasped with both hands over the last few months, and we think will prove to be well-timed purchases.
Regardless of our short-term view on markets, we feel confident that equities remain an attractive asset class over the long term and we remain focused on generating superior returns for shareholders in the Company from a portfolio of our global best stock ideas.