UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
31ST DECEMBER 2022
Legal Entity Identifier: 5493007C3I0O5PJKR078
Information disclosed in accordance with DTR 4.2.2
CHAIRMAN’S STATEMENT
I would like to extend a warm welcome to all shareholders in the Company, including those of you that previously held shares in JPMorgan Elect plc (‘Elect’).
The six-months period to 31st December 2022 has been an extraordinary period for the Company with the completion of the merger with The Scottish Investment Trust plc in August 2022 and with the completion of the merger with Elect in December 2022, effected in both cases by way of schemes of reconstruction. The Company issued new Ordinary Shares and new C Shares in the Company following approval from the respective companies’ shareholders in favour of the combinations. The Board looks forward to providing shareholders with the benefits of economies of scale from the enlarged asset base and in particular, greater liquidity in the Company’s Ordinary Shares. I would like to extend our thanks on behalf of the Board to our Manager and our advisors for their support with this more recent merger.
The Board composition expanded following the Elect merger, and it gives me pleasure to welcome Steve Bates, who was appointed as a Director of the Company on 20th December 2022. This appointment ensures that both sets of shareholders are fully represented during the initial stages of the merger. However, the Board is cognisant of its size and the benefits of smaller boards, and it further recognises the value and importance of diversity in the boardroom. As we refresh the Board in future, as well as ensuring that we have a range of diverse individuals with the necessary skills and knowledge, we will aim to achieve a more ethnically diverse board and with female representation to meet the recommendation of the FTSE Women Leaders Review.
As announced on 16th February 2023, the realignment of the C Share portfolio, from that of the Elect Managed Growth shares to match that of the Company’s Ordinary Shares, is now complete. The C Shares will be converted to Ordinary Shares on a NAV-for-NAV basis, which will rank pari passu in all respects with the existing issued Ordinary Shares, including the right to receive all future dividends declared in respect of the Ordinary Shares*. The timetable and further details of the conversion will be announced in due course.
As announced on 18th January 2023, James Cook has joined the portfolio management team to work alongside current portfolio managers, Helge Skibeli and Tim Woodhouse in the management of the Company’s portfolio. The investment process and investment objective of the Company and its strategy has not changed. Rajesh Tanna, a co-portfolio manager since 2019, has transitioned off the Company’s portfolio to focus on other portfolio management responsibilities within JPMorgan Asset Management. We are pleased to welcome James to the team and wish Rajesh all the best with his other responsibilities.
The period under review saw a challenging environment, dominated by significant geo-political uncertainty, increased market volatility, high inflation leading to fiscal tightening by central banks and rises in interest rates. The Russia/Ukraine conflict continued. Despite this backdrop, I am pleased to report that our performance over the six months to 31st December 2022 reverted to positive returns after last year’s negative absolute returns and was comfortably ahead of our benchmark, the MSCI AC World Index (in sterling terms) (the ‘Benchmark’). Over the six months, the total return on the Company’s net assets (with debt at par) was +8.6% compared with the return on our Benchmark of +3.3%. The return to shareholders over the same period was +9.7%. This is testament to the Investment Managers’ disciplined approach to stock selection and management of the portfolio.
The table below sets out these figures in more detail and highlights the success of stock selection over the period. The Investment Managers’ Report provides a detailed commentary on market developments, portfolio activity and the outlook.
*For the avoidance of doubt, C Shareholders will not be entitled to the third interim dividend payable on 11th April 2023 to shareholders on the register as at the close of business on 3rd March 2023.
Performance attribution
Six months ended 31st December 2022
| % | % | |
| Contributions to total returns | ||
| Benchmark Total Return | 3.3 | |
|  Asset allocation | 0.4 | |
|  Stock selection | 5.4 | |
|  Currency effect | – | |
|  Gearing/cash | -0.2 | |
| Investment Manager contribution | 5.6 | |
| Portfolio total return | 8.9 | |
|  Management fees/other expenses | -0.3 | |
| Net asset value total return – prior to structural effects | 8.6 | |
|  Structural effects | ||
|  Share buy-back/issuance | – | |
| Cum inc net asset value total return – Debt at Par | 8.6 | |
|  Impact of fair value valuation to net asset value | ||
|  total return | 0.2 | |
| Cum inc net asset value total return – Debt at Fair | 8.8 | |
| Ordinary share price total return | 9.7 |
Source: JPMAM and Morningstar.
All figures are on a total return basis.
During the period under review, the Company’s share price was not immune to the market volatility and ranged from a small premium to net asset value (‘NAV’), during which the Company reissued 2,743,000 shares from Treasury to a small discount when the Company bought back 343,261 shares into Treasury. Since the end of the half year period, the Company’s share price has returned to a small premium to NAV and the Company has re-issued the 343,261 shares that were held in Treasury and has issued 115,000 new Ordinary shares as at 24th February 2023. At the time of writing there are no shares held in Treasury.
The Company delivers email updates on the Company’s progress with regular news and views, as well as the latest performance. If you have not already signed up to receive these communications and you wish to do so you can opt in via https://web.gim.jpmorgan.com/emea_investment_trust_subscription/welcome
Writing my statement in the Annual Report six months ago, I noted that there were challenges facing the global economy and these continue. War, elevated global geopolitical tensions, increasing inflation, rising interest rates and slowing economic growth all point towards an uncertain outlook at least over the next couple of years. Much of the world may be facing recession in 2023, if not already there. Notwithstanding these risks, the positive start to 2023 continues with interest rate and inflation optimism as central banks stuck to their previous guidance and delivered the news investors were expecting. Global equity markets have continued their ascent on hopes that there is light at the end of the tunnel.
 We note that current valuations of our portfolio stocks look reasonably attractive from a long-term perspective and should contribute to strong investment returns over time. We should not forget that recessions create investment opportunities, and the Board is confident that the Investment Manager is well positioned to identify these global opportunities and continue to deliver good performance over the longer term.
Tristan Hillgarth
Chairman 27th February 2023
INVESTMENT MANAGERS’ REPORT
Over the six-month period to 31st December 2022, the portfolio outperformed its benchmark, the MSCI All Countries World index. The benchmark was up 3.3% over this time, with the portfolio up 8.6%.
In this report we will discuss the drivers of this strong performance, our outlook for 2023, and how we’re positioning the portfolio to benefit from long-term trends, whilst remaining disciplined on valuation.
Good active management has rarely been so important
Much is written on the subject of where equity markets go from here, with 2022 seeing some retrenchment after two years of an impressive bull market. That rally was in no small part driven by government stimulus and low interest rates, and it is our opinion that we are unlikely to see a repeat of those financial conditions. As such, it seems prudent to assume that the days of this rising tide lifting all ships are behind us. It is difficult to forecast the direction of equity markets, particularly with so many uncertainties facing investors, and so where we focus our energy is on identifying the best investments around the world. It is our belief that this strategy will leave our investors in a strong position, regardless of the trajectory for stocks.
One important message to our investors is ingrained in the stability that this trust brings, and of course the predictable income stream. We look to generate steady, consistent investment outperformance, with our returns rooted in detailed analysis, and our risk profile one that seeks to preserve those gains. We do not seek to take large speculative bets in companies where even the best forecasters would have no clear idea of the end result. Does that mean we risk missing a company that sees its share price rise many times over? Perhaps. But we feel confident we will also avoid speculating on companies that see their price decline to virtually nothing.
Performance Review and Spotlight on Stocks
We were delighted to see continued good performance over the past six months, from a diversified selection of companies around the world. Our disciplined approach to stock selection, looking to identify high quality companies at compelling valuations, meant that we saw positive contributions from the majority of sectors during this period. In a world where interest rates, and therefore the cost of capital, are higher, there are many implications for the valuation of financial assets – and we believe our investment philosophy is well suited to this new regime.
The Automotive sector was one of our best contributing sectors during this period, driven by a number of names. The first of these was Volvo – the truck manufacturer – with the shares up 18% over the past six months. The company published strong results during this period, with truck orders ahead of expectations, a better performance on deliveries, and strong profit margins leading to earnings expectations rising. This was a particularly impressive performance given the supply chain issues that they continue to wrestle with, and it is a company we continue to see as well positioned in the shift towards electric trucks.
Michelin has long held a leading position in the tyre market and, is another name that we see as a beneficiary of the move to electronic vehicles (‘EV’). The increased technical demands as a result of the heavier vehicles requires expertise that few companies possess, and over the next decade we expect this to help their pricing power. Even in a difficult operating environment over the past few months, they were able to maintain their operating profit guidance in the face of inflationary materials costs, and we feel confident they can continue to operate at a high level. We had added to the shares during the final months of 2022 and have been pleased to see this strong contribution.
Finally, within this sector, our belief that Tesla shares were overvalued meant that we avoided a name that saw very poor performance. The shares fell over 60% during the final quarter of the year, reflecting a more difficult pricing environment, and in our view the realisation that Tesla is not immune to the wider competitive challenges that exist in this market. As we see the continued rollout of EVs from other manufacturers, we believe that pricing will continue to face pressure – which in turn means that high margin expectations are unlikely to be met. Of course, if Tesla were to fall to a level that we felt was an attractive entry point, we could change our position. For now, we see better opportunities elsewhere.
Another strong contributor during this six-month period was Ross Stores, a discount retailer based predominantly in the US. They offer apparel and home goods from well-known brands at more attractive prices, and the current inflationary environment has meant that demand for more affordable – yet still fashionable – options has rarely been more relevant. 2022 was a difficult year for this sector, as the excess inventory that plagued much of the retail landscape meant consumers were seeing more discounts than ever before – but this provided the perfect buying environment for Ross. We expect that as traffic to their stores continues to improve, this will drive good earnings growth through 2023. After a strong run for the shares, we have however remained disciplined on position size, recently trimming the size of our holding.
The industrial cyclicals sector was the best performing sector, and pleasingly this performance was also driven by a differentiated group of names. One name that has consistently contributed in recent quarters is Trane Technologies, a US heating, refrigeration, and air conditioning company. We have seen continued strong results from this company, as the move towards more efficient heating and cooling of buildings has provided a long-term structural tailwind, and at the same time they have demonstrated excellent shorter-term pricing power. We are always cognisant of how large we let positions in cyclical companies grow, and after a very strong environment for both residential and non-residential construction, we have continued to trim this back on continued outperformance.
It is always important to assess where investments did not succeed in the way we hoped, and to judge the best course of action going forwards. In some instances, we believe that something in our thesis is broken, and we choose to cut our losses. In others, we believe that a position will prove with time to be a good investment and, will hold onto our positions – or in some cases add further. Lojas Renner, the Brazilian department store clothing company, was the largest detractor from overall performance. Inflation significantly impacted the purchasing power of the Brazilian consumer, and with limited increases in salaries, this led to a reduction in consumer spending in their department stores versus our expectations. This pressure also extended to their consumer finance division, as we began to see higher credit card delinquency rates impact results – and this remains a concern looking forwards. We should not overlook the political environment and the impact on share prices either – the remarkable resurgence of Lula da Silva has led to a very divided nation, and in Emerging Markets in particular that can bring risk. Ultimately, we felt that we had better investment opportunities elsewhere and chose to sell our position post the end of the half year period.
Charter Communications was another large detractor over the past six months, after subscriber growth at the US cable company fell short of expectations. We believe this is in no small part a function of the post-Covid churn environment – where the lower levels of activity in the housing market have had a knock-on effect on the telecoms companies that supply their broadband. However, this pause in activity does nothing to change our belief that Charter continues to have significant pricing power in the coming years, as consumers pay for faster speeds, to satisfy our ever-increasing consumption of data. As a result, we continue to own the stock.
The media and internet sector was the most challenging over the past six months, with two names in particular – Amazon and Meta – proving particularly difficult investments over this period. Meta in some ways demonstrated exactly why we had purchased the shares. They generated excellent operating cash flow from their core business, we saw users come in stronger than some in the market had feared, and ultimately all the characteristics that we would expect from one of the leading digital advertising platforms. However, the investments the company announced it was continuing to make in Reality Labs – their augmented reality/metaverse vision – were far larger than we had expected. Operating expenses will rise by over $10 billion in 2023, with capital expenditure also rising. Part of our investment case had been that Meta would be disciplined on spending here – particularly as there are not many other competitors investing in this space. Unfortunately, we were disappointed. However, we do still believe that the underlying cash flow generated makes this business worth more than it is worth today, and so we maintained a small position in the name.
Amazon is a name we continue to have very high conviction in, and as such we have maintained it as the largest active position versus the benchmark. The poor performance over the past six months has been down to a combination of factors, all of which we believe are temporary. First, the core Retail business has seen depressed operating profit margins for some time. This was in no small part due to the extra expenses associated with the pandemic. Amazon added capacity in order to serve customers’ increased demand as best they could, but it meant that when the world began to reopen and consumers pulled back on ecommerce spending, that additional capacity was seeing poor capacity utilisation. Amazon has been rationalising their spending for some time, but it will not be until the middle of 2023 that the effects will be seen. This disappointed the market, as there had been some hope that it would occur sooner, but does not change our belief that the Retail division will be a very profitable division in the future. The second major part of Amazon’s business is the public cloud division, Amazon Web Services. This business also benefited from increased spending on their services through the pandemic and, is now seeing a period of decelerating growth. We see this as natural evolution as the business becomes larger, and the case for companies moving workloads to the cloud is as compelling as ever. With these temporary factors pressuring the shares, we continue to opportunistically add to our position.
Portfolio Positioning and Outlook
These past few months have been a reminder that investing always comes with some degree of uncertainty, yet despite this we can rely on the tools we have used for many years to deliver the best possible outcomes for our shareholders. We have spoken at length about the pandemic, the conflict in Ukraine, and the risks that come with inflationary pressures and central bank tightening. The next couple of years might be equally uncertain – for instance that tightening might well mean a recession towards the end of 2023, but we don’t allow this uncertainty to distract from the business of finding the very best investments. As we think about the long-term, we think about what opportunities might arise from this uncertainty, and our fantastic team of research analysts work tirelessly to bring those very best ideas to the portfolio.
Our only brief comment on the macroeconomic outlook this time around will be to say that the transmission mechanism for monetary policy works over years, not weeks or months. We should not expect a clear answer to the question of a recession for some time, and we would argue that even if one were to occur, it is more likely to be a mild one. Banks are better capitalised than in the past, the consumer has plenty of excess savings, the labour market is tight, and ultimately all of those factors contribute to one conclusion – there is just not that much leverage in the system. It is this leverage that in the past has caused recessions to become crises, and so whilst we continue to watch carefully, we don’t believe there is any cause for markets to panic, even if economic data does weaken this year.
We have spent a significant amount of time parsing through data to ensure that we are taking advantage of the very best valuation opportunities. We have seen a rapidly evolving landscape in recent months. Where a year ago we saw a sizeable growth bubble in the US, we now see (some) more reasonable valuations. We have seen a rebound in cyclicals more recently, yet there is still a real opportunity in certain sectors to find good value in these companies more sensitive to the overall economic environment. You might ask why, if we see a risk of a recession, we would choose to invest in these more cyclical names? The answer, of course, is valuation. If we were to wait until there was no controversy around these companies, we would miss the opportunity. We are fortunate to have over 30 years of data that helps us contextualise when companies are cheap versus their peers. It is that insight that has driven the strong recent performance, and we will continue to search out those most attractively valued names.
One such example of finding good value when there has been controversy is Nike, which lost almost 20% of its value from July 1st through the end of September. This was the result of some inventory mismanagement, which led to some in the market questioning their strategy of focusing more on reaching the end consumer themselves, rather than relying on wholesalers. We felt this was an overreaction to an event that reflected more about the challenges of supply chain disruptions than anything broken in their strategy and, added to the name over the following weeks. To fund this, we trimmed exposure in names that were no longer looking as attractively valued, with one such example also in the Retail sector being McDonalds. This is no reflection on the quality of McDonalds as a business, but simply what is required to be nimble in the portfolio.
A couple of new names in the portfolio to mention are UPS and Astrazeneca. UPS is a company that we felt had very underappreciated margin prospects, as improved pricing power in the package delivery industry, combined with more discipline around capital spending, driver higher returns. We see their revenue benefiting from stronger business-to-business (B2B) spending, which was depressed through the pandemic, and this too should help profits remain resilient. Astrazeneca is a company that we decided to initiate a position in after a pullback, given the characteristics for which we have admired them for some time remain intact. They have industry-leading topline growth, with recent treatment launches primarily in oncology, but supplemented with rare disease and biopharma therapies. This growth should lead to rising operating profit margins, and longer-term, the innovation for which they have always been known should drive one of the strongest pipelines of new products versus peers.
One notable characteristic of the portfolio today is the sizeable overweight to companies based in the United States. Whilst we are finding many opportunities in names that might be considered more cyclical, we do of course think carefully about the range of outcomes for each company. Undeniably, the US has been a more resilient economy than much of the rest of the world for some time, as they are less susceptible to external shocks impacting economic growth. Europe was facing a difficult time after the Russian invasion of Ukraine, and even China now still faces an ageing population despite reopening looking to boost the economy in the short-term. Therefore, to ensure that balance exists in the portfolio, and that no economic outcome can overly drive the fortunes of our shareholders, we see it as prudent to have more of the portfolio in US companies than has been the case for some time. One other important driver of this is the more appealing valuations of some US technology companies, after significant pullbacks in their shares over the past year. The semiconductor sector is one example where we have large positions in a number of US-listed companies – NXP Semiconductor, Analog Devices, and Advanced Micro Devices being examples of industry-leading technology companies that we see very compelling investment cases for.
Gearing currently remains around 2%, which is driven by our long-term framework, based on long-term valuations, the trajectory for earnings, and the macroeconomic risks that exist. While we see compelling stock opportunities, the market is no longer looking under-valued relative to history and we see downside risks to corporate earnings.
Finally, we would like to thank you all for your support. This has been an exciting time for the Company, as we again announced a merger with another investment trust, JPMorgan Elect plc. This once more increases the size of your Company, bringing with it the benefit of better visibility and liquidity, without changing the consistent methodology with which we have run the trust for many years. We look forward to partnering with you all for a successful 2023.
Helge Skibeli
Tim Woodhouse
James Cook
Portfolio Managers 27 February 2023