Against a volatile backdrop for markets, investment trust JPMorgan Global Growth & Income (JGGI) generated a 9.1% H1 NAV return. That was behind the 13.3% return for the MSCI ACWI (All Countries World Index) in sterling terms but still respectable.
Short-term underperformance
The £3.3 billion trust, which looks for predictable income and long-term growth, has comfortably beaten the benchmark over five and 10 years. However, over shorter periods it can lag, as in the six months to December when the market favoured short-term momentum over long-term fundamentals.
In terms of contribution versus the index, asset allocation detracted 0.5% of performance while stock selection detracted 3.8%. This was down to being underweight certain technology stocks and overweight more defensive, high-quality consumer and healthcare stocks.
The managers have been wary of the sustainability of profit margins and how much momentum has driven stock returns. Therefore, they have preferred higher-quality stocks with superior, resilient earnings growth, but their strategy hasn’t been rewarded short-term.
‘The current market exuberance, fuelled by the AI boom, has compressed investor time horizons’, observe the managers. Markets have become ‘fixated on short-term winners and losers and prone to reward the most recent results’.
However, they admit to underestimating the potential persistence of the rally in momentum stocks. ‘We followed the valuation signals of the process too closely and allowed the portfolio’s underweight exposure to momentum to become too large.’
Lessons learned
In response to current market conditions and the trust’s H1 underperformance, the team has reduced exposure to stocks with near-term challenges. Two examples are diabetes and weight-loss drug maker Novo Nordisk and US medical insurer UnitedHealth.
‘Our strategy often involves investing in companies with negative short-term earnings revisions’, explain the managers. This tends to provide attractive entry points and strong long-term valuation signals and works in most market environments.
The strategy was particularly successful during the pandemic and at the beginning of the war in Ukraine. When price momentum dominates for extended periods, however, it works less well and losing stocks can become a drag on performance.
As a result, although the team are ‘confident in the long-term prospects’ of firms like Novo and UnitedHealth, they have reduced their exposure. They have also adapted their risk model to be more balanced between overweights and underweights relative to the index.
Part of the challenge of being a professional money manager as opposed to a retail investor is constant benchmarking. Retail investors can take as much risk as they like, but the pros must always be ‘benchmark aware’.
In the case of JGGI, the strategy of buying sustainable growth companies at cheap valuations has worked for many years. Without being overweight the biggest momentum names, it’s hard to see how any investor could have beaten the index.
The trust’s share price has been going sideways since last August and momentum is weakening. That’s good news for investors as it provides an opportunity to buy a high-quality portfolio of global growth at an attractive price.
Read the press release here: https://am.jpmorgan.com/gb/en/asset-management/per/products/jpmorgan-global-growth-income-plc-gb00bymky695
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