JPMorgan European dips into revenue reserves during tough year – JPMorgan European has published results for the year ended 31 March 2021. The total return for the year for growth shares was 53.9%, outperforming its MSCI Europe ex UK benchmark return of 33.5%. The NAV total return for growth shares was 40.9%, which the board attributed to stock selection, helped by the return to favour of the trust’s investment style.
For the year, the dividend paid was 4.45p per share, a drop on last year’s dividend of 8.85p. On the year-end share price of 326.0 pence, this represents a yield of 1.4% – down from 4.1% in 2020.This reflects the decline in dividend income experienced across equity markets in the reporting period.
Meanwhile, the total return for the year for income shares was 51.7%, another sharp increase on the previous year. The NAV total return for these shares was 38.7% while the dividend paid per income share was 6.70p, the same as the previous year. On the year-end share price of 143.5p, this represents a yield of 4.7%. In order to maintain the dividend on the income share, approximately 20% of the dividend was paid from revenue reserves.
Extract from the chair:
“General Performance
In my Chairman’s Statement in the Annual Report and Accounts 2020 I reported that your Board were very disappointed with the results. As market sentiment towards value investment style changed, as expected the portfolios were able to benefit. Further detail is provided in the Investment Managers’ Report.
We are charged with ensuring that the overall strategy of the Company to meet its objectives is appropriate and overseeing that implementation. The objectives, quite rightly reflect a desire to provide an attractive longer term investment opportunity in European Equities. We continue to work with the Investment manager in determining, despite the strong performance this year, that we are on track to provide a model which will provide a sustainable attractive return for the longer term.
Enhancements to the investment process for the Company’s Income shares were announced on 7th December 2020 and the Board continue the work to ensure that the Company is best positioned to deliver its objectives.
Gearing
There has been no change in the Investment Manager’s permitted gearing range, as previously set by the Board, of between 10% net cash to 20% geared. At 31st March 2021 the Growth portfolio was 0.0% geared and the Income portfolio was 6.5% geared. These levels of gearing as quoted in this Annual Report and Financial Statements are before the application of derivatives, such as futures, which can be used by the Investment Managers to either increase or decrease the effective rate of the Company’s gearing, according to market conditions. The Company’s net gearing including derivatives is included with the Company’s daily published net asset value.
Conversion between the two share Classes
Annually, the shareholders in either of the two Company’s share classes are able to convert some or all of their shares into shares of the other class without such disposal being treated as a disposal for capital gains purposes.
The Company’s annual share conversion on 15th March 2021 resulted in a relatively small shift out of Income shares and into Growth shares. See page 39 of the Company’s Annual Report and Financial Statements for further details. The Company’s next share conversion will be in March 2022. Details are also available from the Company’s website.
Discounts, Share Issuance and Repurchase
At the forthcoming Annual General Meeting (AGM) on 8th July 2021 as referred to below, the Company will seek to renew its permission to allot new equity in order to manage the balance between the supply and demand for its shares, subject to the requirements and conditions as detailed in the notice to the AGM on page 102 of the Company’s Annual Report and Financial Statements. Such allotments benefit all shareholders not least by increasing the liquidity of the Company’s shares. The Board has a proactive approach to the use of its share issuance and repurchase powers in normal markets.
The Board remains of the view that it is important to seek to address imbalances in the supply and demand for the Company’s shares and to thereby minimise the volatility and absolute level of the discount to net asset value at which the Company’s shares currently trade. The Board does not wish to see the discounts widen beyond 10% under normal market conditions (using the cum-income NAV) on an ongoing basis. The precise level and timing of repurchases pursuant to this policy depend upon prevailing market conditions. As markets were so disrupted during this reporting period, active buy back of shares were not used as a tool to control the discount for a number of months as it was felt that this would be ineffective. Over the year under review the discount levels have averaged 13.3% for the Growth shares and 13.2% for the Income Shares (both at fair value and on a cum-income NAV basis). Accordingly, over the 12 month period the Company repurchased a total of 1,942,730 Growth shares and 2,180,618 Income shares.
The discount at which the Growth shares were trading below the prevailing net asset value decreased during the financial year, reflecting the improved market conditions.
Environmental, Social and Governance Considerations
The recent appointment of Guy Walker as a non-Executive Director of the Company illustrates the Company’s intent regarding ESG, as he was former Global Head of ESG Investment at Schroders. As detailed in the Investment Managers’ report, Environmental, Social and Governance (‘ESG’) considerations are integrated into the Investment Managers’ investment process. The Board shares the Investment Managers’ view of the importance of ESG factors when making investments for the long term and of the necessity of continued engagement with investee companies throughout the duration of the investment. Further information on the Manager’s ESG process and engagement is set out in the ESG Report on pages 15 to 16 of the Company’s Annual Report and Financial Statements.
Investment Managers
As referred to in the my Chairman’s Statement of the Company’s Half Year Report and Financial Statements to 30th September 2020, the Board announced changes to the Company’s Investment Management team on 19th October 2020. It was detailed that Stephen Macklow-Smith would be retiring and new co-managers will be joining the team. With effect from 31st October 2020, Matt Jones joined Michael Barakos and Thomas Buckingham as co-manager of the Income portfolio and Alexander Fitzalan Howard has been joined by Zenah Shuhaiber and Timothy Lewis as co-managers of the Growth portfolio.
The performance of the Investment Managers is formally evaluated by the Board annually. The evaluation of the Manager was undertaken in January 2021 and based on the data available at that time; the Board concluded that the performance of the Manager had been satisfactory and that their services should be retained.
Transfer of Reserves between the Growth and Income Portfolios
During the period the Board exercised its power to approve transfers of retained revenue reserves from the Growth portfolio to the Income portfolio in exchange for the equivalent amount of capital reserves from the Income portfolio to the Growth portfolio. This transfer is reflected in these Report and Financial Statements.
Outlook
The vaccine rollout around the world has fuelled optimism for a strong economic recovery later in the year as national ‘lockdowns’ abate and some form of economic normality resumes. The very significant stimulus packages introduced by central governments, in addition to record levels of household savings should help to further boost economic recovery.
Conversely, there are fears of the return of inflation, high or excessive debt levels and recurring trade tensions. Furthermore, the scale and longevity of Covid-19 remains unknown, with the impact of new variants and the possibility of further waves an imponderable.
Whilst we are in unchartered waters there remain significant investment opportunities in Europe and we support the manager’s approach to address those in achieving our long term objectives.”
JETI/JETG : JPMorgan European dips into revenue reserves during tough year