Kepler | Trust Intelligence

JPMorgan Indian Investment Trust

JPMorgan Indian (JII) aims to generate long-term capital growth by investing in high-quality companies benefitting from exciting secular growth trends in Asia such as the growing young demographic, urbanisation and digitalisation. Managers Rukhshad Shroff and Rajendra Nair have worked together on the portfolio since 2003, giving them extensive experience in Indian equities. They have access to the vast Emerging Markets and Asia Pacific (EMAP) equity team at JPMorgan, made up of sector specialists who can place Indian companies in the context of their international peers. The managers have a highly active and stable stock-picking approach intended to look through short-term noise and identify those companies with superior growth prospects over at least five years. Over the long term their approach has led to steady outperformance of the MSCI India benchmark, although in recent years performance has been hit by their decision not to hold one stock which is a major part of the index and has outperformed (as discussed in the Performance section). Thanks to this underperformance, a tender offer was triggered at the end of September 2019 and 25% of the share capital was repurchased by the trust. However, it will remain the largest India specialist investment trust. Discounts have been volatile in Asia in 2020 thanks to the coronavirus scare. JII’s discount did come in since the tender offer, but has since widened out to 13%.

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JPMorgan Asia Growth & Income (JAGI) uses detailed fundamental research done by a team of over 40 investment professionals to identify superior growth companies in the Asia Pacific region. The team aims to take a long-term view, and looks through the volatility and unpredictability often found in the economies, markets and politics of Asian countries. As such, the process depends less on one or a few people making the right calls again and again, but more on a wide, experienced team implementing a sound strategy consistently. The trust has performed extremely well in recent years with minimal levels of gearing. As we discuss in the Performance section, JAGI is the second-best performer of all Asia Pacific trusts (growth or income) over five years, almost entirely down to strong stock selection. It has outperformed a passive investment in its benchmark index in each of the past seven years. JPMorgan Asia Growth & Income, renamed from JPMorgan Asian in February 2020, pays 1% of NAV each quarter as a dividend – out of capital if necessary. Since implementing this policy in 2017, the discount has generally been in single digits, having been in double digits previously – it is now 1.3%. The portfolio continues to be managed – as it has always been – for capital growth, despite the new dividend policy. JAGI offers more exposure to ‘growthier’ sectors, such as information technology and consumer discretionary, than the typical income trust. This has helped JAGI to outperform the other AIC Asia Pacific Income trusts on a total-return basis while offering a comparable yield.

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UKW JCH JPGI ASEI CTY

March is traditionally considered ‘ISA season’, when UK investors focus on their annual ISA allowance and are encouraged to ‘use it or lose it’. As we highlighted in our article last year, investment trusts within ISAs are an excellent way to benefit from the power of compounding over the long term, without worrying about the tax consequences of whether you are receiving capital gains or dividend income. Our analysis last year showed that the top ten compounding trusts – since Personal Equity Plans or PEPs (the precursor to ISAs) were first introduced – come from a very wide range of asset classes. We determined that the distinguishing factors between them were manager skill and the unique ability, afforded by the structure, for investment trust managers to truly invest with a longer-term horizon than the open-ended competition.

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Twentyfour Income Fund

TwentyFour Income Fund (TFIF) aims to generate a high annual income for investors of at least 6p on the issue price of 100p, with a total return of 6% to 9% p.a., by investing in the higher-yielding, less liquid parts of the pan-European asset-backed security (ABS) market. It pays a quarterly dividend, distributing all income each year, and has met its dividend and total-return targets each year since launch in 2013. In fact, the board is committed to holding a continuation vote if TFIF fails to hit its dividend target in any financial year. The current yield is 5.9%. The investment universe includes mortgage-backed securities, both residential and commercial, collateralised loan obligations and assets backed by consumer and student debt. All are floating rate, meaning they carry minimal interest-rate risk. Major risks are credit risk, regulatory risk and stock-specific risk. We discuss the securitisation structure in the Portfolio section. TFIF is run by a specialist team at TwentyFour Asset Management. They use their expertise to invest in this relatively esoteric, illiquid asset class and a number of the team members have experience as originators of ABS as well as buyers. This, as well as the closed-ended structure, allows them to take advantage of the inefficiencies in the market and the smaller unrated deals which can fly under the radar of larger investors. The trust has a five-year average premium of 2.7%. This has allowed the board to grow the trust by issuing shares although, as we discuss in the Discount section, this only happens when the managers believe this will not dilute the quality of the portfolio.

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Greencoat UK Wind

Greencoat UK Wind (UKW) provides a pure investment exposure to UK wind farms, with the twin aims of delivering a high, RPI-linked income return for shareholders whilst maintaining capital value in real terms. These aims have been fully met so far. As we discuss in the Dividend section, the dividend forecast for next year is 7.1p, representing a compound annual growth of 18.3% since listing. NAV progression has also remained ahead of inflation, with growth of 22.1% against RPI over the same period of 17.4%. In share-price terms, shareholders have enjoyed a total return of 115.1% since launch to 31 December 2019. During 2019, the trust’s earnings were below budget thanks to wholesale power prices remaining below average last year and thanks also to lower power generation from the wind-farm portfolio. Even so, UKW’s dividend was well covered at 1.4x. The manager’s long-term expectation is 1.7x. UKW continues to grow, and now has gross assets of £2.44bn invested in 35 wind farms. Despite a competitive market, the manager has deployed around £800m of capital (invested and committed) over 2019, and is now becoming ‘utility scale’. UKW now provides around 1% of UK electricity generated. As we note in the Discount section, the publication of a bearish note on long-term electricity prices by Bloomberg New Energy Finance has caused a healthy reduction in the premiums across the sector, not to mention the recent market falls. UKW trades at a premium to the peer-group average, perhaps because of the higher investment returns so far delivered, the higher discount rate, and also because of its well-covered dividend.

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SST AIE ANII DGN

The coronavirus outbreak in China has developed from a humanitarian catastrophe to a stock market panic. While the short-term economic impact of the virus could well be severe, there are still fundamental reasons to be invested in developing Asia for long-term investors. Historically one reason investors have been encouraged to invest in emerging Asian markets is to benefit from the region’s greater GDP growth. The OECD forecasts that UK real GDP, that is adjusted for inflation, will grow by 2.2% a year between 2020 and 2060, and the USA by 1.9%, whereas China is projected to grow by 2.4% and India by as much as 4.5%.1 Thanks to the power of compounding, this increase amounts to growing 1.1 and 1.3 times larger in the case of the US and UK, 1.5 times in the case of China and 4.5 times in the case of India. Economic theory posits that the long-run return from a stock market should be equal to the long-run growth in corporate earnings, which is determined by long-run GDP growth. On that basis China and India should see much greater stock market gains. This theory has a poor record in practice, and it is now common knowledge that GDP growth and stock market returns are generally not correlated. Indeed, it is possible that the correlation is weakening over time, given the propensity for companies to list in countries outside of their main areas of business. This doesn’t mean that GDP growth potential in emerging markets is irrelevant, however. We would argue that the underlying drivers of GDP growth are very relevant to the earnings potential in individual companies, which means that GDP growth can be valuable information for a stock-picking manager. In fact, we would argue that understanding the reasons behind GDP growth gives a better comprehension of how to invest in developing countries – such as those in Asia – and the advantages they really have. We consider why you might add to your Asia exposure in your ISA this year, despite the short-term issues, and look at some stock-picking trusts set up to generate alpha from the region’s advantages.

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