JPMORGAN AMERICAN INVESTMENT TRUST PLC
UNAUDITED HALF YEAR RESULTS
FOR THE SIX MONTHS ENDED 30TH JUNE 2023
Legal Entity Identifier: 549300QNAI4XRPEB4G65
Information disclosed in accordance with the DTR 4.2.2
CHAIR’S STATEMENT
Performance
The first six months of 2023 has been a positive period for the US stock market, despite continuing economic uncertainty and further rate hiking by the US Federal Reserve. The total return on net assets per share in sterling terms over the period was 14.8%. The return to Ordinary shareholders per share in sterling terms was 12.1%, reflecting a small widening of the Company’s discount to net asset value per share (‘NAV’) at which the shares traded over the period. The total return from the Company’s benchmark, the S&P 500 Index in sterling terms, with net dividends reinvested, expressed in sterling terms was 10.5%, resulting in an outperformance of 4.3% in net asset terms.
Since the Company changed its investment approach on 1st June 2019, it has outperformed the benchmark index by 10.0% in the subsequent 49 months through to the end of June 2023, providing a NAV total return to shareholders of 79.9% compared with a benchmark return of 69.9%. This is an annualised outperformance of 1.6% since the change in investment approach.
Share price and Discount Management
The Company’s shares have traded at a discount to NAV throughout the period under review and the Company has continued to buy back its shares in line with the Board’s longstanding position of buying shares back when they stand at anything more than a small discount to NAV. The Company bought into Treasury a total of 6,181,802 shares, or 3.4% of the Company’s issued share capital as at end of June 2023 excluding shares held in Treasury (30th June 2022: 1.2%). These shares were purchased at an average discount to NAV of 3.8%, producing a modest accretion to the NAV for continuing shareholders.
Dividend
The Company is declaring a unchanged dividend of 2.5 pence per share (2022: 2.5 pence) for the first six months of this year, which will be payable on 6th October 2023 to shareholders on the register on 1st September 2023.
In the absence of unforeseen circumstances, the Board is aiming to at least maintain the total dividend of 7.25 pence per share for the current financial year.
Gearing
The Board has set the current tactical level of gearing at 5%, with a permitted range around this level of plus or minus 5%, meaning that currently gearing can vary between 0% and 10%. This tactical level of gearing remained unchanged throughout the period. The Company began the year with gearing of 5.9% and ended the period with gearing of 5.1%.
The Board believes it is prudent for its gearing capacity to be funded from a mix of sources including short and longer term tenors and fixed and floating rate borrowings. The Company has a £80 million revolving credit facility (with an additional £20 million accordion) with Mizuho Bank Ltd. The Company also has in issue a combined US$100 million of unsecured loan notes issued via private placements, US$65 million of which are repayable in February 2031 and carry a fixed interest rate of 2.55% per annum and US$35 million of which mature in October 2032 and carry a fixed interest rate of 2.32%.
TCFD
As a regulatory requirement, JPMorgan Asset Management (JPMAM) published its first UK Task Force on Climate-related Financial Disclosures (‘TCFD’) Report for the Company in respect of the year ended 31st December 2022 on 30th June 2023. The report discloses estimates of the Company’s portfolio climate-related risks and opportunities according to the Financial Conduct Authority (FCA) Environmental, Social and Governance (ESG) Sourcebook and the Task Force on Climate-related Disclosures (TCFD). The report is available on the Company’s website under the ESG documents section: https://am.jpmorgan.com/content/dam/jpm-am-aem/emea/regional/en/regulatory/esg- information/jpmorgan-american-investment-trust-plc-tcfd-report.pdf
The Board is aware that best practice reporting under TCFD is still evolving in regard to metrics and input data quality, as well as the interpretation and implications of the outputs produced, and will continue to monitor developments as they occur.
Board
As mentioned in the Company’s 2023 Annual Report, Ms. Pui Kei Yuen joined the Board from 1st January 2023 and Sir Alan Collins, the previous Senior Independent Director and Chair of the Risk and Remuneration Committees, retired from the Board at the conclusion of the May 2023 AGM. Ms Nadia Manzoor became the Senior Independent Director and Chair of the Remuneration Committee, and Mr Robert Talbut assumed the Chair of the Risk Committee on Alan’s retirement.
As previously communicated, after 10 years on the Board, I intend to retire at the AGM in 2024. Further information about Chair succession will be provided in due course.
Outlook
The pace and level of interest rate increases executed by the Federal Reserve since March 2022 appears, so far, to have delivered the favourable outcome of significantly reduced inflation while avoiding a recession for the economy. The stock market has duly reflected this positive environment during the period. In light of the strong returns achieved in the first half of 2023, it would seem prudent to consider the upward progress in the market may pause for a period as the full implications of the Federal Reserve’s rate rises over the past 17 months fully work through the economy and have their impact on company earnings. Our portfolio managers have shown considerable skill in navigating the last four years since the Company’s investment policy was changed, and shareholders should take confidence in the focused and long term investment approach they follow with the Company’s portfolio.
Dr Kevin Carter
Chair 9th August 2023
INVESTMENT MANAGER’S REPORT
Market Review
After a fairly challenging 2022, the first six months of 2023 took many by surprise, as the S&P 500 advanced 17% in US dollar terms and 11% in sterling terms. In 2022, the market was forced to process an extremely aggressive monetary policy tightening by the Federal Reserve, as it fought to contain the inflationary cats that escaped from the bag during the pandemic and following Russia’s invasion of Ukraine. The magnitude and pace of Fed Funds rate increases was unparalleled since the late 1970s, instilling a fear of recession and creating strong headwinds for longer duration assets such as equities, and higher growth equities in particular. As 2022 came to a close, the market started to conclude that the Fed’s actions were sufficient, and that even if rates did not come down for a while, they were probably close to their peak.
Economic data has been broadly supportive of the market’s intuition that things might stop getting worse. The Consumer Price Index (CPI) has fallen steadily from a peak of 9% in June 2022, to 3% exactly one year later. This easing in the pace of inflation occurred despite a strongly lagging impact from the largest single CPI component, the cost of housing, which is just starting to register in the data now. Almost all other areas of inflation have moderated, and we have seen outright deflation in many areas, including many commodities, and in transportation and logistics, as supply chains have reopened and inventory stockpiles have been run down. China’s unexpectedly lacklustre rebound since its reopening has further compounded these deflationary effects.
One confounding aspect of this cycle has been the corporate sector’s reluctance to cut jobs in response to tougher trading conditions. In fact, the economy continues to suffer labour shortages, particularly in areas that are still experiencing pent-up consumer demand, such as travel and leisure, and auto production. However, anecdotal evidence does suggest that many firms are now being more cautious in their hiring, and layoff announcements have certainly picked up recently. Wage inflation remains somewhat above the historic ‘normal’, but the year-on-year increase in average hourly earnings was only 4.4% in the June labour report.
The sharp move in interest rates over the past 12 months created considerable challenges for the regional banking sector and triggered the dramatic failure of three banks – SVB, First Republic and Signature Bank – in the early part of this year. Monetary tightening phases such as this one have a history of triggering high profile failures, from Long Term Capital Management in 1998, to Lehman Brothers, Bear Stearns and Washington Mutual in 2008. Banks are significantly better capitalised and regulated than 15 years ago during the 2008 global financial crisis, but periods like this clearly favour the largest players. Bank lending surveys highlight that corporate lending standards have tightened considerably and that small bank lending, particularly loans linked to potential losses on commercial real estate, needs to be monitored closely.
Within equity markets, the megacap tech stocks, which slipped out of favour last year, bounced back strongly this year, and have accounted for a significant share of the S&P 500’s performance year-to-date. The resurgence was partly triggered by the launch of ChatGPT, which showcased recent breakthroughs in generative artificial intelligence (AI). For the first time, individuals have direct access to the underlying large language model that is capable of answering complex questions and solving problems. In our view, the widespread availability of this technology is likely to prove very significant, as it has the potential to deliver productivity improvements in many white collar roles, including the writing of software code itself, that have previously only been experienced in manufacturing. Companies are already investing aggressively in this area, both as an offensive weapon, and to try to defend their existing businesses.
The best performing sectors for the S&P 500 so far this year have been the tech-heavy ones, with information technology, communication services and consumer discretionary rallying between 33% to 43% over the review period. Energy, which was the best performing sector in 2022, was one of the worst performers year-to-date, registering a 6% decline due to the drop in oil prices and fears of an economic slowdown. Defensive stocks did not fare well either, with utilities (-6%) and healthcare (-1%) suffering declines. Surprisingly, given the turmoil in the banking sector, financials finished the period down by only 0.5%.
Large cap stocks, as represented by the S&P 500 Index, returned 17% (in US dollar terms), as mentioned above, outperforming the small cap Russell 2000 Index, which returned 8%. In contrast to 2022, growth dominated value, as the Russell 3000 Growth Index rallied 28%, while the Russell 3000 Value Index returned 5%.
Performance attribution
For the six months ended 30th June 2023
| % | % | |
| Net asset value (fair value) total return (in sterling terms)APM | 14.8 | |
| Benchmark total return (in sterling terms) | 10.5 | |
| Excess return | 4.3 | |
| Contributions to total returns | ||
| Large cap Portfolio | 4.3 | |
| Allocation effect | -0.4 | |
| Selection effect | 4.7 | |
| Small cap Portfolio | -0.2 | |
| Allocation and selection effect | -0.2 | |
| Gearing1 | 0.8 | |
| Share buybacks | 0.1 | |
| Management fee and expenses | -0.2 | |
| Impact of fair value valuation2 | -0.2 | |
| Technical differences3 | -0.3 | |
| Total | 4.3 |
1 Cost of gearing plus the impact of holding cash and liquidity stocks compared to the benchmark. Includes impact of FX movement on debt.
2 The impact of fair valuation includes the effect of valuing the combined $100 million private placement at fair value. It is the sum of the impact on the closing NAV of the fair value adjustment and its impact on the calculation of total returns arising from the reinvestment of dividends paid in the period into the Company’s NAV.
3 Arises primarily where there is a divergence in the total return calculations. This is due to different methodologies being used to calculate the total return set out in the attribution calculations. The Company’s NAV total return is calculated by Morningstar and includes reinvestment of dividends paid by the Company. The JPMorgan Asset Management in-house attribution system calculates the return at a portfolio level and includes dividends receivable by the Company from the underlying stocks held in the portfolio during the period, on an ex-dividend basis.
Source: JPMAM and Morningstar. All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.
APM Alternative Performance Measure (‘APM’).
A glossary of terms and APMs is provided on pages 31 to 33 of the full Half Year Report.
Performance and overall asset allocation
The Company’s net asset value increased by 14.8% on a total return (in GBP) basis over the first six months of 2023, outperforming its benchmark, the S&P 500, which returned 10.5% (in GBP). The large cap portfolio was the main contributor to the Company’s outperformance of its benchmark. Gearing also added some value. While the small cap growth allocation, which averaged 7% over the period, participated in the market rally, it failed to match the return of the S&P 500 and therefore detracted slightly from relative performance. The Company’s longer term performance track record remains positive. It has delivered strong outright gains and outperformance over three, five and ten year periods, its average annualised return over the three years ended 30th June 2023 was 16.9% in NAV terms, versus a benchmark return of 13.3%.
Large Cap Portfolio
Over the past six months, the Company’s large cap portfolio benefited from stock selection in the industrials and information technology sectors, as our holdings in these sectors outperformed their benchmark peer groups.
Overweight positions in Quanta Services and Hubbell proved beneficial in the industrials sector. Both companies offer exposure to the accelerating trend of electrification of the entire economy, which we see as inevitable and urgent. This will be a multi-decade process. Quanta is the largest engineering and construction company serving the utility sector, with electric utilities being its largest segment. The company benefits directly from the upgrading and strengthening of transmission lines, the interconnection of new solar and wind generation assets, and the construction of solar generation assets themselves. The massive (and confusingly named) Inflation Reduction Act allocates hundreds of billions of dollars of Federal support to the types of projects that Quanta undertakes. Hubbell is a long-established provider of electrical components deployed within the grid, especially those related to last-mile distribution. As more and more households purchase electric vehicles, the burden on the local grid will become extreme, requiring significant upgrades and a lot more built-in intelligence.
In information technology, our overweight positions in NVIDIA, Palo Alto Networks and Advanced Micro Devices were the largest contributors to relative performance over the period. The share price of NVIDIA, which provides graphics and network solutions for gaming companies, suppliers of virtual reality kit and other digital service providers, rallied significantly as the company posted strong quarterly results and issued guidance which was a long way ahead of consensus expectations. This surge reflected the broad-based demand for NVIDIA’s graphic processing unit (GPU) chips which remain almost the only game in town for very large computing workloads, such as the training of AI models. Another producer of GPUs and microprocessors, Advanced Micro Devices (AMD), continues to take market share from its struggling rival, Intel, in the key data centre central processing unit (CPU) area. Furthermore, AMD, along with NVIDIA’s, are the only independent players of scale in the GPU space, although AMD’s software ecosystem lacks the capabilities of NVIDIA in the high-performance computing and AI markets. Shares of Palo Alto Networks, a provider of cybersecurity software, rallied on the back of strong earnings results and upbeat guidance. Total billings maintained their strong growth as cybersecurity budgets remain very resilient, and Palo Alto continues to strengthen its position as a leading player in the space. We believe corporate spending on cyber security will remain strong in the face of increasingly sophisticated cybersecurity threats, and the continued transition to cloud computing.
At the sector level, relative performance was hindered most by our stock selection in communication services and our overweight position in financials. While the communication services sector did generate a positive return for the period, our holdings lagged their benchmark peers. In particular, an overweight position in Charter Communications, a broadband and cable operator, detracted from performance. While the shares appreciated over the six months, the gain was modest compared with the returns posted by Alphabet (parent of Google) and Meta Platforms (formerly Facebook), where we re-established a position in March. There have been concerns about slowing broadband subscriber growth, particularly at a time when existing home sales are depressed. However, we remain comfortable with our position as Charter Communications continues to pursue a strategy of leveraging mobile and rural builds to restore subscriber growth.
In financials, while our names outperformed their benchmark peers, our overweight positioning detracted, as it was one of the worst performing sectors in the index over the past six months. Specifically, our holdings of Bank of America, M&T Bank and Loews were the largest detractors on a relative basis. Bank of America and M&T Bank came under pressure as investors reacted negatively to the collapse of Silicon Valley Bank, causing a ripple effect on banking stocks in general. We remain comfortable with our positions in both names given their diversified loan books, attractive core deposit franchises, and superior credit quality. While Loews, which operates insurance, energy and hotel businesses, posted strong earnings, its share price lagged in a market fuelled by stronger growth names.
Portfolio Activity
During the first six months of the year, we added four new names and exited the same number. One new acquisition was Meta Platforms, a name we have owned previously. We realised early in the first quarter of the year that the market was not recognising the positive changes the company has implemented. We also expect the company to benefit from many favourable shifts in market dynamics. It had pivoted very quickly to rein in capital expenditure and operating expenses in 2022. Meta also faced numerous headwinds including increasing competition from TikTok, the negative impact of privacy changes to Apple’s Identifier for Advertisers (IDFA) user, a weaker than expected advertising backdrop, and concerns over its ambitions in virtual reality and the ‘metaverse’.
However, we re-opened a position in Meta in early March on the view that the company, with over 2 billion users, is effectively addressing many of these challenges. We also believed that Meta’s use of AI will improve monetisation in a more user-friendly way, as well as upgrade and streamline content monitoring and consumer protection. The company was trading at an attractive valuation of approximately 14 times our forward earnings estimates, generates a lot of free cash flow and has a balance sheet with net cash of over $30 billion. Since this acquisition, Meta has reported very strong results. As we anticipated, its investment in AI has boosted engagement and enhanced monetisation, thereby supporting revenue growth. The company has also seen an increase in daily active users, and the time spent per user. Our purchase of Meta was funded by an exit from Zoom Video Communications. The post-pandemic headwinds faced by its consumer business are by now very well understood, and the core enterprise side remains healthy, but the stock’s valuation remains trapped by the threat of competition from Microsoft Teams, and now also perhaps by an AI-boosted alternative, thanks to Microsoft’s large investment in OpenAI, the creator of ChatGPT.
Another name added during this period was Intuit, a business and financial management solutions company. It owns dominant finance and accounting software brands like QuickBooks, TurboTax, Credit Karma and Mailchimp. The majority of Intuit’s clients are small businesses with strong cash reserves, and we believe it has a significant opportunity to cross-sell to existing clients. Furthermore, in our view, the durability of QuickBooks’s double digit revenue growth over the next few years is underestimated by the market, and the company is well-positioned to benefit from strong tailwinds driving small and medium-sized businesses, including the shift to software solutions, rising omni/online channel spend, and the rise in digital banking solutions. We view Intuit as a high-quality company with a relatively defensive business model, whose P/E valuation has corrected back to 2018 levels. Yet it offers largely idiosyncratic 10%+ revenue growth, and very healthy margins. We funded this name by exiting Ingersoll Rand. This company is a leader in a wide range of mainly compression-based industrial technologies, including products that offer much greater energy-efficiency. To date, the company has executed flawlessly, but we do worry that a weaker general economy could impact them adversely.
These recent acquisitions and disposals have not had a significant impact on the portfolio’s structure. Financials and information technology remain the largest sectoral allocations, which together represent approximately 42% of the overall large cap allocation, an increase of 4% compared with the start of the year. Financials remain the largest overweight in the portfolio relative to the benchmark, although the allocation is slightly lower than at the start of the year, as we have been trimming modestly to manage position sizes given increased risks. Conversely, we remain underweight information technology, but have been adding to our allocation based on our view that this sector is still attractive. The portfolio also remains underweight consumer staples, industrials and healthcare, as we continue to find names with better risk/reward profiles in other sectors.
The large cap portfolio is divided between value and growth stocks, with the allocation allowed to vary between 60:40 and 40:60. At the end of the review period, value stocks comprised some 44% of the large cap portfolio, much lower than the 51% value allocation at the start of the year. The allocation to growth stocks has increased accordingly.
The table below shows that the large cap portfolio is trading at a 20% discount to the market on a free cash flow basis, which confirms that we are not paying a premium for good cash flow. Additionally, the portfolio is expected to deliver earnings growth of around 11% for the next 12 months, which is similar to the market. While earnings may come under pressure over the next year, and may not deliver the forecast double digit growth, it is comforting to have the valuation cushion provided by our holdings, relative to the market.
| Characteristics | Large Cap Portfolio | S&P 500 |
| Weighted Average Market Cap | USD 621.9bn | USD 643.6bn |
| Price/Earnings, 12-month forward1 | 18.9x | 18.2x |
| Price/Free Cash Flow, last 12-months | 15.2x | 19.0x |
| EPS Growth, 12-month forward | 10.60% | 10.30% |
| Return on Equity, last 12-months | 19.60% | 23.40% |
| Predicted Beta | 1.08 | – |
| Predicted Tracking Error | 3.03 | – |
| Active Share | 64% | – |
| Number of holdings | 40 | 501 |
Source: FactSet, Barra, J.P. Morgan Asset Management. Data as of 30th June 2023.
1 Including negatives.
Small cap portfolio
The small cap portfolio is allocated solely to growth stocks. It returned 7.3% over the period, supported by the updraft from the rally in larger cap growth stocks, but underperformed the S&P 500, which meant it had a slight negative impact on relative returns over this period. The overall allocation to the small cap portfolio was maintained at approximately 7% during the first six months of the year, broadly unchanged from the start of the year.
Outlook
While the US economy has so far held up, perhaps better than expected, the outlook is for slower growth across demand, profits, jobs and inflation. The tightening in credit conditions has so far been modest, but we would expect it to drag on economic activity, hiring and inflation in coming quarters. Meanwhile, the Fed has remained steadfast in its determination to keep monetary policy restrictive for longer than previously anticipated, and it has kept the door open for additional tightening if necessary. However, while the risks for the economy are mainly focused on slower demand, slower job gains and slower profit growth, recession is still not a foregone conclusion.
It is worth bearing in mind that, similar to the situation in the late 1980s/early 1990s, the economy has been experiencing something of a rolling recession: existing home sales have been extremely weak, due to the adverse impact of higher mortgage rates, and the pull-forward of demand during the pandemic; auto production is still recovering from the intense supply chain challenges and the car fleet has aged significantly, which should support demand over the next couple of years at least; while transportation companies have been through a harsh recession as inventories have corrected across multiple industries.
Meanwhile, much of the speculative excess experienced in the stock market during the period of extremely cheap money and massive government largesse during Covid-19 has been flushed out. Unprofitable growth stocks, cryptocurrency, the SPAC phenomenon, and Cathie Wood’s ARK fund have all come back down to earth. So now the market is back to climbing its ‘wall of worry’ as caution prevails, and heavy cash balances wait for the ‘All Clear’.
In our view, the best strategy is to look through these short-term fears and uncertainties and take the long view. We believe it is equally important to remain focused on the highest quality companies; be mindful of valuations but be willing to pay for truly sustainable growth. This approach has served the Company and its shareholders well in the past, ensuring it has delivered strong outright gains and outperformance over the short and long term, and we are confident it will continue to do so going forward.
Timothy Parton
Jonathan Simon
Felise Agranoff
Portfolio Managers 9th August 2023