A higher yield and gearing: JPMorgan Asia Growth and Income

A higher yield and gearing could increase JAGI’s attractions to a wider shareholder base…by Ryan Lightfoot-Aminoff

Overview

The board of JPMorgan Asia Growth & Income (JAGI) has overhauled the trust’s dividend and gearing policy with the aim of further differentiating the trust from the peer group and increasing the appeal to investors. Firstly, the board has announced a 50% increase in the level of the enhanced dividend, meaning the trust will pay out a substantial 6% of NAV per annum from a combination of the portfolio income generation and capital. Furthermore, managers Robert Lloyd and newly appointed Pauline Ng have begun to use limited Gearing, with the potential for this to become a bigger feature of the trust in the future with the aim of supporting long-term outperformance.

Despite these changes, the process remains the same, with Robert and Pauline focussed on identifying high-quality companies at attractive valuations from across the region and holding them in a concentrated Portfolio. The managers also use some top-down inputs to make sure the portfolio is not overly tilted in any one direction, providing core-like exposure to the region.

This approach means stock selection should be the primary driver of performance, and this has been behind the consistently good performance—the trust having beaten the market in seven of the past nine calendar years. In the near term, the managers have also successfully navigated the big dispersion in markets over the past 12 months to deliver performance broadly in line with the benchmark (see Performance).

Despite this long-term track record, the trust continues to trade at a wide Discount. The board has been very active in managing this, having undertaken significant buybacks to successfully achieve its goal of keeping the discount narrower than 10%.
 

Analyst’s View

These moves are an excellent example of how to maximise the benefits of investment trust structure, in our view. The ability to pay dividends from capital has long been a differentiator, though the decision to increase this to such a high level means the trust could now appeal to a wider range of investors (see Dividend). This could be particularly appealing for those looking to construct a portfolio of diversified income streams, as the Asian market has very different dynamics driving it to the typical UK equity income portfolio.

Furthermore, the introduction of Gearing has the potential to increase long-term returns. Whilst the level of additional exposure is currently limited, if it proves successful, it could become a feature of the trust and further contribute to the upside, especially considering the managers’ track record of delivering modest but consistent outperformance in a variety of market conditions.

Thirdly, we believe the board has taken a very shareholder-friendly approach to share buybacks, using significant resources to keep the discount no wider than the target range. This has also been NAV accretive. In our opinion, this is particularly encouraging during the recent challenging times for the asset class and a good example of positive corporate governance.

Despite this, the Discount remains which adds to the opportunity for investors. Not only does the level provide a potentially attractive entry point for the long term, allowing investors to buy a strategy that has shown the ability to outperform repeatedly at less than NAV, but it also adds to the prospective yield, due to the dividend being based on NAV.

Bull

• Recent dividend increase means a high, and potentially diversified source of yield
• Strategy has repeatedly delivered outperformance which supports long-term cumulative returns
• Discount is wider than average, with significant support from the board through buybacks

Bear

• Introduction of gearing could increase the risk, as well as support potential upside
• Capital contributions for the dividend could impact long-term growth potential
• Core-like exposure means potential for significant outperformance over the short term is limited

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_{Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by JPMorgan Asia Growth & Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}

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