The JPMorgan Global Growth & Income trust is the top performer in the global income sector.
The value of having independent non-executive directors to oversee the management, strategy and governance of investment trusts has been demonstrated by the JP Morgan Global Growth & Income Trust (LSE: JPGI), once called the “poster child for investment trusts”.
Two years ago, the trust, then called the JP Morgan Overseas Trust, was a £200m fund with a good investment record but languishing on a discount to net asset value (NAV, the value of the underlying portfolio) of 15%. The trust had been steadily shrinking owing to share buybacks, and became too small for the bigger wealth managers to invest in.
Modest strategy change
When faced with persistently poor performance or an investment strategy that no longer appeals, directors have a range of options. They can, with shareholder approval, change the investment mandate; they can require the investment management company to replace the team allocated to them; they can move the trust to another investment manager; and they can wind it up or solicit a merger with another trust.
In this case, “performance was pretty good and excellent in the long term, so no change in the fund-management personnel or process was necessary”, says Gay Collins, the senior independent director. The directors only needed to initiate a modest change of strategy.
A change of rules had allowed trusts to pay dividends out of capital and the board had seen the increasing popularity of income, with income trusts trading at a premium, says Collins. After consulting their advisers, Winterflood, they decided to take advantage of the change in rules by raising the dividend yield to 4% of NAV, topping up the revenue account from reserves. This offered investors a generous yield without the need to invest in higher- yielding stocks – a strategy that normally involves a much higher sacrifice of capital return than the extra income gained.
Best in its class
Two years on, the trust has net assets of £400m, a very different long-term shareholder base, and yields 4%, with a third of the dividend financed by revenue in the year to mid 2018. More importantly, the shares trade at a premium to NAV, which has enabled it to grow through share issuance, improving liquidity.
Performance, helped by ongoing costs of just 0.56% per year, is the best in the global income sector, with a NAV return of 70% over five years and 45% over three. Shareholders have done even better, 85% over five years and 64% over three, as the discount has disappeared, though that boost clearly cannot continue since share issuance will prevent the premium rising further.
Despite the good long-term record, the investment team has found the going a little more difficult recently, with returns 0.7% behind the MSCI World Index in the year to 30 June, and a further 0.6% behind in the next quarter. They attribute this to being underweight the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google), despite a 54% allocation to North America, and to the poor performance of holdings such as pharmaceutical company Allergan.
But Ping An (Chinese insurance), DBS (Singapore bank) and UnitedHealth (US insurance provider) performed well, and the recent drop in FAANG stocks will have helped, potentially giving an opportunity to increase holdings.
With the discount gone, future shareholder returns will depend solely on investment performance, but the proposition of a 4% yield without the constraint of having to invest for yield is attractive. The directors have earned their modest fees – just 0.03% of net assets.
Activist investor Elliott Management has built up a stake in German pharmaceutical company Bayer, according to Reuters. It has owned shares in the company for over a year, during which time the stock has fallen by around 40%, so nobody can accuse Elliott of being short-termist, says Liam Proud on Breakingviews. It’s been a bad year for Bayer. The group completed its $63bn acquisition of Monsanto only to be hit by 9,000 lawsuits relating to its weedkiller.
Elliott can push the company to sell or spin off the different divisions, but it wouldn’t be easy, as Germany’s union-elected board members can resist radical surgery. But the case for keeping the business together looks weak. Sometimes, patience is not a virtue.
Short positions… ETF market opens up
• One of the longest-running mysteries of financial markets is surrendering its secrets, says Chris Flood in the Financial Times. The true scale of trading activity across Europe’s $783bn exchange-traded fund (ETF) sector has long been a subject of speculation and debate, but strict disclosure requirements introduced in January have now made it possible to make a far more accurate assumption about the size of the market.
In 2018, the value of reported ETF trading quadrupled to roughly $2trn relative to last year, when the visible liquidity was limited to about $500bn. ETF providers believe more new investors will now be drawn to low-cost tracker funds, as they can make a more realistic assessment of liquidity conditions (how easy it is to buy and sell investments).
• Shares in CatCo Reinsurance Opportunities fell by 44% last Friday on the news that its investment manager will increase loss reserves held for 2017 to cover losses related to that year’s hurricanes, as well as the California wildfires, said Morningstar. CatCo, which offers investments linked to catastrophe reinsurance risks, expects the increase in reserves to reduce the fund’s net asset value (NAV) per share by about 28%.
The fund’s investment manager is also assessing the potential impacts to the portfolio from the 2018 California wildfires, and expects a “material impact” in the 30 November NAV figures. Separately, the fund also reported that the US and Bermuda governments are looking into the loss reserves of CatCo’s investment manager in late 2017 and early 2018.