JPMorgan Elect releases annual results

JPMorgan Elect (JPE) has released its annual results for the year ended 31 August 2020. The trust manages a number of different pools and shareholders have the option to switch between these periodically. Key highlights from the report are provided below, as well as the investment manager’s reports for all of the individual share classes.

• The Managed Growth portfolio has delivered a total return on net assets of +0.4%, compared with the portfolio’s benchmark which returned -3.3%. Over the medium and longer term, performance remains well ahead of benchmark.
• For the managed Income portfolio, dividends for the year totalled 4.7p per share (2019: 4.65p per share).
  • In determining the level of the fourth interim dividend, the Board took into account the level of dividends received and to be received by the Company, the anticipated dividends for the coming financial year and the commitment made in the 2019 Annual Report. It says that dividend growth of 1.1% is consistent with our aim to increase the total dividends by at least inflation.
  • The portfolio delivered a total return on net assets of -12.1% in comparison to the benchmark return of -12.7%. The Board highlights that the risk remains of a potentially large negative impact from continuing dividend cuts and cancellations, and says it will keep under review the level of dividends received, and expected to be received from portfolio companies.
  • The fourth interim dividend was not fully covered by the income earned in the financial year and therefore the Company utilised the Managed Income Class revenue reserves which it has built up over previous years to support this dividend.
  • Following payment of this fourth interim dividend, the Managed Income Class revenue reserve will equate to approximately three quarters of the full year dividend.
  • In the absence of unforeseen circumstances, the Board intends to declare the first three interim dividends for the year ending 31st August 2021 at 1.1p per share. The level of the fourth interim dividend will be determined by the Board towards the end of the Company’s 2020/21 financial year and will depend on the level of dividends received and expected by the Company.
• The Managed Cash share class returned +0.5% on net assets and an interim dividend of 0.4p per share was paid for the year ended 31st August 2020.
  • The Board considers this class to be an asset allocation tool which continues to benefit shareholders of the Company’s other share classes, offering the opportunity to switch into a safer share class in times of market volatility.
• During the year, shareholders took the opportunity to convert between share classes. This resulted in a decrease in the Managed Growth share class shares in issue of 61,003, a decrease in the Managed Income share class shares in issue of 1,202,274 and an increase in the Managed Cash share class shares in issue of 1,558,492. In addition, 815,206 Managed Cash shares were redeemed.

Investment manager’s report – managed growth

Performance Review

“The Managed Growth portfolio outperformed its benchmark for the year to the end of August, returning +0.4% versus the benchmark return of -3.3%. However, the discount widened over the period, delivering a total return to shareholders of -3.8%.

The key driver of the portfolio’s outperformance was stock selection.

Performance was mixed across underlying holdings, with our North American and global strategies delivering the strongest positive absolute returns. JPM American Investment Trust was the largest positive contributor to absolute return, with the trust benefitting from strong stock selection in the consumer discretionary, information technology and health care sectors. However, the majority of our UK and European holdings delivered negative absolute returns; by way of example, JPM Claverhouse Investment Trust posted negative returns driven by its cyclical bias and high gearing as we entered the period of extreme volatility in March. In addition, our holdings in emerging markets generated negative returns in aggregate.

Relative performance across the period was mixed, with 21 strategies outperforming, whilst 15 strategies underperformed their benchmark. JPM Japanese Investment Trust was a notable outperformer, delivering an excess return of 17% over the year against its benchmark (TOPIX). The trust benefitted from the quality growth tilt in the portfolio and the higher allocation to internet businesses.

Performance attribution for the year ended 31 August 2020

Source: JPMAM and Morningstar. All figures are on a total return basis.

Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.

A glossary of terms and APMs is provided on pages 103 to 106 of the Annual Report.

At the year end, the investment trust sector (excluding private equity, hedge funds and direct property) average discount was -5.2%, compared with -4.6% at the previous year end (Source: Winterflood).

Portfolio Activity

At the end of August 2020, 37% of the portfolio was invested in JPMorgan managed investment trusts, 27% in JPMorgan managed open-ended funds and 33% in investment trusts managed by third party managers with the balance held in futures and cash.

During the first six months of the financial year the portfolio maintained an underweight position to Japan and Europe and an overweight position to the US. We started the financial year with a slight overweight position to the UK, before reducing that position in October by selling some of the Edinburgh Investment Trust holding (completing the disposal in February) and remained close to neutral until the end of January 2020. We increased our emerging market equity exposure, adding Genesis and Templeton Emerging Markets trusts in December and January respectively, as the global manufacturing sector started to recover from the suppressed levels of 2019. At the end of January 2020 the investment trust sector average discount had tightened to 2.2% before widening to 6.0% at the end of February as the impact of Covid-19 started to be felt.

We reduced our allocation to JPMorgan Claverhouse, BlackRock Smaller Companies and JPMorgan Smaller Companies in March, in order to lower exposure to the UK and small and mid-cap companies. We further reduced this in April and May, increasing our underweight position to the region versus benchmark given the prevailing economic backdrop and impact of Covid-19. As we moved into the second quarter, we made some further changes in our emerging market equity holdings, reducing exposure to trusts that offer broad emerging market exposure and adding a small position in JPMorgan China Growth and Income Trust. We also moved from an underweight to an overweight position in Europe, adding to the European Opportunities Trust and the Growth class of JPMorgan European Investment Trust. Our relative overweight position in the US increased during the year due to market movements; however, we scaled this back in August through selling some of our JPM US Equity All Cap and JPM US Select Equity fund exposure.

On a regional basis US, Europe and Asia continue to be the largest overweight positions across our portfolio holdings. We have recently become more constructive on the UK given the attractive valuations on a relative basis and added to the JPM UK Equity Plus Fund in August. Having said this, the uncertainty around Brexit and the impact of Covid-19 still leads us to an underweight position for the region.

We have maintained our preference for the US as economic data revealed a solid recovery, though at a moderating pace. Furthermore, the US Federal Reserve’s intentions to maintain extraordinarily accommodative monetary policy for as long as necessary to support the economy further supports US stocks. Europe and emerging markets are favoured but their growth will be dependent on global growth.

Outlook

After a short but deep recessionary period, triggered by measures to control the spread of Covid-19, the world has entered into a new phase of growth. This is characterised by persistent and highly supportive monetary policy accommodation, which should remain a tailwind for growth and financial markets for the foreseeable future. Medium term, we expect fresh rounds of fiscal stimulus and the prospect for higher inflation. Although the final results of the US election are as yet unknown, a Biden presidency with split Congress seems most likely and election uncertainty has faded as an influence on markets. In recent weeks we have seen a rise in Covid-19 infection rates and a return to lockdown measures in some European countries. More positively, reports of success in Covid-19 vaccination trials has driven equity markets higher and could prove a catalyst for a rotation away from this year’s equity sector winners.

Our favoured regions remain US, Europe and Asia as their growth is levered to global growth. We still expect above-trend growth, on average, through 2021, although most economies have made the transition to a more normal pace of early-cycle expansion after the explosive initial rebound in April 2020.

Investment trust discounts widened at the height of market volatility in March, which proved to be a headwind for the portfolio. Whilst there has been a subsequent narrowing across the sector, we will look carefully for opportunities that these discounts bring, while maintaining exposure to those funds that we believe will be able to perform over the long term.”

Katy Thorneycroft (pictured), Simin Li and Peter Malone (Investment Managers) 20th November 2020

Investment manager’s report – managed income

Dividend Review

“The impact of Covid-19 on dividend payments is without precedent. Since the onset of the virus, three quarters of UK listed companies scheduled to pay dividends either cut or cancelled their pay-outs. The value of dividends paid by the constituents of the FTSE All Share Index fell by 57% in total. Dividends from the largest 100 companies in the FTSE Index fell by 45% while those from mid cap companies (FTSE 250) fell by 76%. With economies in lock-down across the world the over-riding imperative for companies was to preserve cash flow to shore up balance sheets.

A large proportion of the total cut came from financials after the Bank of England required banks to suspend their dividend payments. Pressure was also brought to bear on insurance companies to suspend pay outs. It is noteworthy that Legal & General, confident in the resilience of its balance sheet, decided to pay its dividend. However, Royal Dutch Shell and BP, stalwarts of the dividend list for generations, both cut their payments. In the case of Royal Dutch Shell this was for the first time since the Second World War. Consumer staples companies such as food retailers, drinks producers and food producers whose revenues are less volatile proved to be more resilient with some companies such as Tesco increasing their pay-outs.

Performance Review

For the Company’s financial year ended 31st August 2020 the Managed Income portfolio delivered a total return of -12.1% in comparison to the benchmark return of -12.7%.

Performance attribution – for the year ended 31 August 2020

Source: JPMAM and Morningstar. All figures are on a total return basis. Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.

A    Alternative performance measure (‘APM’).

A glossary of terms and APMs is provided on pages 103 to 106 of the Annual Report.

Our holdings in Games Workshop, Dunelm and Polymetal were amongst the biggest contributors to performance. Despite the closure of their physical stores both Games Workshop and Dunelm experienced stronger than expected sales performances thanks to rapid growth in their on-line presence. Polymetal’s earnings and share price performance benefited from the rising gold price.

On the other hand, detractors from performance included National Express, Royal Dutch Shell and Cineworld. Lockdown meant a collapse in passenger traffic for National Express and the closure of Cineworld’s cinemas. Royal Dutch Shell’s shares fell as the oil price collapsed and the company announced its dividend cut.

Portfolio Activity

In early March we took the decision to reduce the gearing of the portfolio as markets fell in response to the pandemic and the associated impact on economic growth and corporate profitability.

The general exposure of the portfolio by sector did not change materially. Life Insurance and Home Construction remain our two largest sector exposures. As noted in the Half Year Report we were pleased that our largest holding in the Life Insurance Sector, Phoenix Group, increased its cash flow guidance and committed to paying the dividend. Legal & General also confirmed that they would pay their dividend. Aviva cancelled their final 2019 dividend and will communicate a decision on a new dividend policy in the last quarter of 2020. Whilst the dividend is likely to be reduced the resultant yield should still compare favourably to the market. We also believe that the shares offer good value at these levels. It is encouraging that our two largest holdings in the Home Construction sector, Berkeley Group and Persimmon have resumed paying dividends as building activity has recommenced.

Transactions

We sold International Consolidated Airlines; we believe that there will be a structural change in the demand for business travel as remote working and teleconferencing appears to have come of age. Alpha Financial Markets Consulting was sold following a strong recovery in the share price and as we saw more attractive stock opportunities elsewhere following the market sell-off. We also sold our holding in IWG as the demand for office space is also likely to be structurally lower.

We added selectively to some of our holdings such as Next, OneSavings Bank and Persimmon to take advantage of valuation opportunities. Despite near term uncertainty we believe that these businesses are fundamentally sound. We acquired Brewin Dolphin, a leading UK wealth manager, following an impressive set of results amid the crisis and an attractive valuation. Assuming a payout ratio towards the lower end of the guided range (60-80% of net profits), the shares currently yield 4.3%.

We also participated in several equity re-financings – Hollywood Bowl, SSP and WH Smith. With stronger balance sheets these companies are now in a position to weather any reasonable disruption from the pandemic and benefit from business opportunities at the expense of weaker competitors with capital constraints.

Gearing at the financial year end was 5.9%.

Outlook

We expect markets to remain volatile over the next few months primarily due to Covid-19 and Brexit negotiations. A rise in Covid-19 infection rates in October led to a reversal of progress towards the re-opening of economies in the UK and a number of other countries although we do not believe that total lock downs will be imposed with educational facilities, manufacturing and construction sites remaining open. The economic damage should therefore be much lower than Q2. More encouragingly, reports of success in Covid-19 vaccination trials has driven equity markets higher. Monitoring the impact of Brexit negotiations, we believe a limited free trade agreement with considerable transition arrangements to ease the ‘day one’ burden of change is likely.

Corporate earnings and dividends will be appreciably lower this year, with the financials and energy sectors especially badly affected, and although 2021 will see recovery it will again take many quarters before profitability returns to pre-crisis levels. It is likely that the fall in dividends in 2020 will be approximately 40%. However we believe that we have seen the worst of the dividend cuts. Companies in the FTSE All Share Index are currently forecast to deliver 20% growth in aggregate though this is subject to great uncertainty.

Relative to sovereign bonds, cash and other equity markets, UK equities still offer an extremely attractive yield and we should remember that the nature of economic cycles is that short-term hits to profitability and dividends tend to presage longer recoveries. Following large share price falls, many stocks are looking very attractively valued. Therefore we believe that there continue to be good opportunities for stock pickers to add value.”

John Baker and Katen Patel (Investment managers) 20th November 2020

Investment manager’s report – managed cash

“The Managed Cash share class returned +0.5% on net assets over the 12 month period to 31st August 2020. The Managed Cash class invests its assets in the Sterling Managed Reserves Fund which has an objective to invest in a blend of money market securities and short term bonds.

During this 12 month period, the Bank of England’s (BoE) Monetary Policy Committee (MPC) reduced the deposit rate by a total of 0.65% in two stages. The first cut of 0.50% took place on 11th March 2020 with the second cut of 0.15% taking place shortly after on 19th March. These cuts were implemented alongside several other programmes in order to support the UK economy in the face of the Covid-19 crisis which significantly increased volatility across risk assets. As at 17th November 2020, the base rate set by the BoE is 0.10%.

The Covid-19 pandemic shook markets in March. However, as outlined in the Global Markets Review on page 8 of the Annual Report, following record breaking fiscal and monetary stimulus from governments and central banks, risk markets subsequently recovered. As economies began to reopen, credit spreads tightened and the measures that were imposed were extremely successful in depressing volatility. This trend has continued since April and can be seen by looking at GBP Corporate 1-3 year credit spreads, which tightened from a peak of 272 bps on 24th March 2020 to 105 bps at the end of August 2020.

During this time, Brexit is another topic that has come into focus and is a risk that we continue to monitor closely. UK PM Boris Johnson and EU Commission President Ursula von der Leyen did not agree to an extension to the transition period by the 30th June deadline. Accordingly, the UK has until the end of the year to agree and formalise a deal with the EU. There are doubts as to whether a deal, and if so a constructive deal, can be struck in this timeframe.

Portfolio Commentary

At the end of August 2019, with risk assets performing and market sentiment strong, the fund’s duration stood at 0.59 years. Heading into 2020, as concerns around Brexit came into focus and the impact of Covid-19 became clear, we increased the quality of the assets in the portfolio, retaining a strategic overweight to credit but reducing allocations to securitised credit (AAA Mortgage Backed Securities for example) and BBB rated assets. Additionally, we increased our allocations to sub 3-month maturity assets to build liquidity into the fund. BBB exposure was halved during March and sub 3-month exposure over the year increased from 19.6% to 42.1%. Following the crisis, in the second quarter of 2020 we selectively added corporate credit into the fund, taking advantage of attractive valuations following the significant widening of credit spreads. Subsequent spread compression has since helped to generate total returns.

Outlook

As we look into the final quarter of the year, we expect to see volatility as the market contends with second waves and localised lockdowns. Specific risks such as Brexit and longer term trends such as US/China relations could keep risk markets choppier than we felt over the summer. Following the US election, Joe Biden is projected to have won enough electoral college votes to become president. However, the margin of victory was smaller than expected and the split of seats within the Senate will moderate the size of a fiscal stimulus package or corporate tax increases. Nonetheless, any package that will be passed, combined with accommodative monetary policy should be positive for growth.

We have decreased risk slightly, reducing overall credit risk and taking some profits considering the repricing that has occurred since March. Nonetheless, with the Bank of England likely to maintain an accommodative stance and potentially cut interest rates into negative territory some time in 2021, we still have exposure to longer-dated assets whilst maintaining high levels of liquidity within the portfolio.”

JPMorgan Asset Management (Investment Manager)

previous story | next story