A difficult first half for JPMorgan American (JAM) has not dented the optimism of its fund managers who say the growing opportunities from artificial intelligence (AI) and the resilience of the US economy bode well for the future.
The £2bn investment trust, which owns the managers’ 20 best “growth” and 20 top “value” stocks in an aim to beat the S&P 500 index, made an underlying investment return of 10.7% in the six months to 30 June.
That was behind the 11.6% advance in the US benchmark, which recovered strongly after big falls in March in response to the US-led war on Iran, and has continued to advance to a record high last week.
JP Morgan fund managers Felise Agranoff, Jack Caffrey and Graham Spence admitted the underperformance was “disappointing” but said the US market had been propelled higher by a small band of AI winners, which their more diverse portfolio struggled to beat.
However, they were confident their search for a broad range of high-quality businesses with good growth prospects would maintain the trust’s longer record of outperformance. Since JAM adopted the dual growth and value approach in June 2019, it says it has generated a 198% total return on investments, 14.1% more than the 183.9% of the S&P 500. That’s also ahead of rivals Baillie Gifford US Growth (USA) and Pershing Square Holdings (PSH).
The three managers said their optimism was underpinned by JP Morgan analysts forecasting “robust” earnings growth from S&P 500 companies of 26% this year and 22% in 2027.
With AI investment still in its early stages, despite massive spending by US internet giants, the JP Morgan trio saw ongoing opportunities not only in the supply chain for data centres, but also in companies reaping productivity and margin gains from the new technology. Meanwhile, innovation elsewhere was creating attractive openings in autonomous driving, robotics and software, they said.
While far from oblivious to the geopolitical and monetary policy risks facing the US, whose long-term borrowing costs have shot up to 5.3%, provoking an intervention by its Treasury to double repurchases of long-dated government debt, ultimately the managers believed the inflationary impact of high oil prices caused by the Middle East conflict could be offset by backing “businesses with durable competitive advantages”.
To that end the investment team had a busy six months increasing the portfolio’s exposure to AI while leaving it open to good value businesses in healthcare, energy and financials.
SpaceX joins the JAM pot
Within the broad arena of technology, the half-year results showed they opened a small 0.5% position in SpaceX after its record $1.7trn flotation in June, impressed by its market leadership in low-cost rocket launches and near-earth satellites.
They also brought in Advanced Micro Devices, a 2.8% position, believing its shares could continue to rise as demand for its graphics processing units grows.
Snowflake, a cloud-based data platform at 1.1% of the portfolio, was added on the basis that rising AI adoption will make its data management services increasingly popular with businesses.
Along with top 10 positions in Nvidia (8%), Apple (4.2%), Broadcom (3.5%), Microsoft (2.9%) and Analog Devices (just under 2.9%), JAM held 33.5% in IT at 30 June, its biggest sector allocation but a 4.5% underweight compared to the S&P 500.
Industrial stocks were lifted from 6.8% to 8.9% as the managers opened positions in AI plays United Rentals (2.7%) and Comfort Systems (2%) and upped an existing holding in Canadian Pacific railway to 1.9%.
United shares advanced strongly as its equipment rental business enjoyed a boom from the surge in data-centre development, leading the managers to subsequently trim the position. Similarly, demand for Comfort’s specialist air-conditioning and cooling systems shot through the roof as data centres battled to control temperatures in their high-tech environments.
These additions were funded by the sale of industrial conglomerates Honeywell and 3M, and also Trane Technologies, a less attractive rival to Comfort.
JAM’s interim dividend was held at 2.75p per share while its ongoing charge remained at a competitive 0.35% of net assets. The company spent £42.6m on buying back its shares to ensure their price did not stray too far from the underlying net asset value of its investments.
In the half year the discount widened from 2.7% to 3.4% reducing shareholders’ total return to 9.9%. As of yesterday, the company’s five-year total return to shareholders, including dividends, stood at 91% bang in line with the S&P 500.
Our view
Matthew Read, senior analyst at QuotedData, said: “JPMorgan American’s slight underperformance over the half year is understandable given that the market has been driven by a relatively narrow group of AI-related winners and more speculative stocks that do not naturally fit the managers’ approach, which emphasises quality and valuation discipline. Encouragingly, they are adapting the portfolio to capture more of the AI opportunity, particularly through semiconductor, data-centre and infrastructure beneficiaries, while retaining that discipline.”
