JPMorgan Multi-Asset Growth & Income plc (LON:MATE) has announced its unaudited half-year results for the six months ended 31st August 2021.
CHAIRMAN’S STATEMENT
Introduction
The Company’s objective is to generate income and capital growth through a multi-asset strategy, while seeking to maintain lower levels of volatility than a traditional equity portfolio. Our commitment to this objective is underpinned by the Company’s distribution policy, which aims to achieve a yield of 4.0% on the Initial Issue Price of £1.00 per share at the time of the Company’s launch in 2018. From 1st March 2021, the start of the Company’s current financial year, the Board implemented changes to the Company’s investment flexibility, distribution policy, reference index and name. Please see below for details.
Portfolio Performance
During the half year to 31st August 2021, the Company recorded a positive total return of 9.2% on its opening net asset value, an outperformance of 6.2% over the Company’s Reference Index. As detailed in my Chairman’s Statement of the Company’s Annual Report, from 1st March 2021 the Company’s Reference Index is a total return of 6.0% per annum measured over a rolling five year period.
During this reporting period the success of the vaccine rollout in the world’s developed economies helped fuel an economic recovery as national ‘lockdowns’ were eased and some form of economic normality resumed. The very significant stimulus packages passed by central governments, most notably in the US, in addition to record levels of household savings also served to support the economic recovery. As a consequence stock markets performed well, with ‘value’ stocks in particular rallying strongly as beneficiaries of economic opening and as a recovery from their very poor performance during 2020.
Gearing
The Company may use gearing, in the form of borrowings and derivatives, to seek to enhance returns over the long term. During the period the Company had no bank loans/facilities or structured debt, but did use derivatives to enhance portfolio returns and for efficient portfolio management. The level of the Company’s gearing at 31st August 2021 was (2.2)%, (28th February 2021: (6.9)%), reflecting a decrease in the net cash position of the Company during this reporting period. See page 27 of the Company’s Half Year Report and Financial Statements. for further details and definition of Gearing.
Further details of the portfolio are provided in the investment managers’ report on page 9 of the Company’s Half Year Report and Financial Statements.
Share Price Performance
I am pleased to report that following the changes introduced at the start of this reporting period, the Company recorded a positive share price total return to shareholders of 21.8% during the half year to 31st August 2021. The very strong performance of the share price was partially due to the significant narrowing of the discount to net asset value at which the Company’s shares trade. The discount commenced the period under review at 12.6% but moved steadily inwards to close on 31st August 2021 at 2.5%. The average discount during the period was 5.9%, with the shares trading between discounts of 14.9% and 1.8%. The Board utilized their authority to buyback shares in the Company, taking advantage of the steady improvement in net asset value over the period, to narrow the discount substantially. Shares bought back in the period totalled 1,800,000.
Revenue and Distributions
During the half year to 31st August 2021, the Company’s net return after taxation was £7,593,000 (2020: net loss after taxation: £(4,387,000)). In the period up to the signature of this half year report, the Board has declared two interim distributions, each of 1.025 pence per share, in respect of the Company’s year ending 28th February 2022. The Company has not elected to ‘stream’ any part of these distributions and therefore both are designated wholly as dividend for tax purposes.
Changes to Investment Flexibility, Distribution Policy, Reference Index and Name of Company
As detailed in the Company’s RNS Announcement released on 23rd March 2021, whilst maintaining the Company’s investment objectives, the Company has made the following adjustments effective following its 28th February 2021 year end.
Investment Flexibility
The Manager has greater flexibility in the allocation of the portfolio across the JPM strategies following a revision of the expectation that the portfolio is required to provide a fully covered dividend from its income.
Distribution Policy
Cognisant of a rise in the medium term risk of rising inflation the Board links its progressive distribution policy to the UK’s annual Consumer Price Index (CPI) from the current distribution level of 4 pence per share per annum. The Company will draw on distributable revenue and capital reserves when the dividend is not covered by current year income.
Reference Index
LIBOR is likely to cease to exist by the end of 2021. While SONIA (Sterling Overnight Interbank Average Rate) is likely to be the most widely used replacement for LIBOR, the Board considered it an opportune moment to review the Company’s Reference Index of LIBOR plus 4.5%. After consideration, the Board decided that a clear and simple Reference Index would better serve Shareholders. Effective from 1st March 2021 the Company’s Reference Index is equivalent to a total return of 6.0% per annum, measured over a rolling five year period. The Managers believe that, although higher than the previous target, this return is achievable based on JPMorgan’s long term return assumptions which inform the Strategic Asset Allocation for the portfolio, together with additional alpha from active positioning both bottom up and top down.
Name of the Company
To better reflect the investment objective of providing an attractive total return of growth and income, the Company has changed its name to JPMorgan Multi-Asset Growth & Income plc, effective from 31st March 2021. The Company’s stock market ticker, MATE, was unchanged.
The Board of Directors
There were no changes to the composition of the Board of Directors during the reporting period and the intention is to continue with a complement of four directors.
Outlook
Economic forecasts remain strong with healthy corporate earnings prospects and plentiful liquidity. This should be positive for global equity markets. Nevertheless, concerns remain over the trajectory of inflation and the potential for less supportive central bank policy. New variants of Covid-19 continue to disrupt economic growth in certain regions with low vaccination levels, most notably in parts of Asia. Furthermore, the potential fallout from Evergrande, the indebted Chinese property company, could reverberate through the property and banking sectors both within and beyond China.
Despite these potential negatives for investor sentiment and global growth, the Board are confident that the JPMorgan Multi-Asset team have the expertise to successfully navigate challenging markets and to achieve the objectives of generating income and capital growth which the Company set at launch.
Sarah MacAulay
Chairman 18th October 2021
INVESTMENT MANAGERS’ REPORT
Introduction
In this report, we review the Company’s investment performance for the 6 month period to 31st August 2021, a period when risk assets rallied, supported by strong private sector balance sheets and accommodative policies. We examine how the Company’s diversified portfolio has performed against this positive market backdrop and how we are positioned as we look forward in this environment.
Setting the scene – our investment approach
We seek to achieve the best investment returns for shareholders while maintaining the overall portfolio volatility below that of equity markets. We do so through investing in a globally diversified portfolio that includes company shares, bonds and other assets. Our aim is to construct an actively managed, balanced portfolio which is flexible with respect to asset class and geography. The increased investment flexibility that was announced in spring of this year allows us to take advantage of the best opportunities to deliver an attractive total return to our investors. We take a research based approach, positioning assets in line with our medium to long-term view of markets, and leveraging the expertise of active managers in portfolio construction.
Market review: Risk-taking appetite intact despite uncertainty looming large.
Global equity markets rallied in March driven by massive US fiscal stimulus and the success of the vaccine rollout in the US and UK. The USD 1.9 trillion ‘Biden Stimulus Package’ was signed into law and real GDP in the US accelerated in the first quarter, recording an annualized increase of 6.4%. The Eurozone’s economy shrank 0.6% during the first quarter of the year as countries extended lockdowns and restrictions to contain a third wave of infections. With the economic recovery gaining strength, US inflation in April accelerated at its fastest pace in more than 12 years which measured by the consumer price index (CPI)* rose to 5.3% on a year-on-year basis. US private sector firms signalled an unprecedented expansion in business activities with manufacturing and service sectors accelerating on stronger consumer demand.
The earnings season for the first quarter of 2021 was strong as the majority of companies reported earnings growth well ahead of expectations. Eurozone consumer confidence increased in May, beating expectations. In the UK, the labour market indicated strengthening demand and a brighter outlook.
Global equities continued to rally in June supported by an accelerated pace of vaccine rollouts and further re-opening of economies from virus-related restrictions. Though fears of higher interest rates and the more contagious ‘Delta strain’ of the novel coronavirus affected investor sentiment, markets took solace in the encouraging economic recovery data. The Federal Reserve acknowledged that tapering was now being discussed but reaffirmed the Fed’s commitment to maintain asset purchases until substantial further progress has been made towards its inflation and employment goals. In the Eurozone, business activity continued its strong growth and consumer confidence increased. The European Central Bank made no changes to its policy and opted to keep language in its statement around the significantly higher pace of asset purchases relative to the start of the year. In the UK, the labour market continued to improve and the Bank of England kept its policy unchanged.
Global equities extended their strong run of performance in July supported by a strong start to the second-quarter earnings season. We saw volatility in markets as a crackdown on the private tuition market in China rattled the stockmarket there and raised fears of further potential regulatory action in other sectors. As a result, emerging markets, in general, witnessed heightened volatility and selling pressure. The US economy grew at 6.5% in the second quarter, which came in below consensus, but consumer spending growth continued to remain strong. Furthermore, the Fed kept its policy rates unchanged and indicated that the economy was still a good deal away from making substantial further progress towards its inflation and employment goals. In the Eurozone, business activity continued its strong growth as economies continued to open up from Covid-19 related restrictions.
Upward momentum continued in August driven by positive economic data, rising corporate profitability and continued assurance of support from central banks. As pent up demand continued to remain strong for goods and services, the US consumer price index rose 5.4% year-on-year. Additionally, the economy added 943,000 jobs in July, beating expectations and the unemployment rate fell to 5.4%, a new low of the pandemic era. Furthermore, Fed chair, Jerome Powell, indicated that the central bank would continue to be cautious in its approach to tapering its massive pandemic-era stimulus. In the UK, a strong labour market report showed that the economy continues to improve, however, private sector companies continue to report constraints on business activity due to staff shortages and supply chain issues.
How has the Company performed over the 6-month period under review?
The Company delivered a positive return on net assets of 9.2% over the period, performing ahead of the Company’s Reference Index which returned +3.0%.
The portfolio’s developed equity exposure was the largest contributor to absolute performance. Our regional equity allocation decisions, implemented via futures, provided a small negative contribution to returns driven by our short US and Continental Europe large cap positions. Performance across fixed income markets was positive in aggregate, with high yield bonds proving the strongest performing sector.
Portfolio review
Since March, our total equity exposure has remained around 68% which was beneficial against the backdrop of rising equity markets and reflects our positive view on the intermediate term global growth outlook.
For equities, stock selection is undertaken by our in-house International Equity Group and we tilt regional positioning to reflect our latest views. We implement this via the use of index futures. This approach enables us to maintain positions in high conviction stocks whilst adjusting regional exposure to reflect our favoured markets. At the beginning of the period we reduced exposure to emerging market equities given our preference for cyclical developed markets such as Japan.
We made some changes to our fixed income exposure over the review period. While we still favour high yield over investment grade corporate bonds, we feel the potential for return is now more muted and we scaled this position back by almost 5%. We also reduced our exposure to emerging market debt. We added a new total return strategy which takes an unconstrained approach to dynamic investment across the fixed income market. We also introduced a new position in a global convertible bond fund in the first quarter, this hybrid asset class offers exposure to equity risk together with more defensive characteristics from the bond component.
Our bespoke equity portfolio continued to favour names with sustainable dividend yields trading at attractive valuations. At the end of August, the portfolio had the greatest overweight to autos, banks and industrial cyclical and positioned with an underweight to consumer staples, basic industries and utilities. During the period, the team increased their position in insurance while reducing retail exposure. The portfolio benefitted from stock selection in telecommunications and property while detractors included stock selection in insurance and utilities. On a regional basis, the team remain significantly overweight Europe and underweight Asia and the UK.
Outlook
Although global growth momentum peaked in the second quarter, strong economic data, policy support and successful vaccine rollout continue to drive fundamentals. While the renewed Covid-19 surge may slow the pace of reopening, it is unlikely to be reversed and the rest of the year should still see a broader recovery across the major developed economies.
Looking ahead, earnings growth should be strong in 2021 but could slow as profit margins come under pressure next year from higher wages, rising commodity prices and increasing corporate taxes. However, for now, a combination of booming demand and surging productivity continues to bolster profits. Though every crisis is different, looking out into the next five years, we expect earnings growth to be substantial, front-loaded and not very dissimilar to the rebound from the global financial crisis. Cyclically geared markets, sectors and companies, which have been in the eye of the storm, are likely to benefit, but it is crucial to differentiate cyclical from structural headwinds and tailwinds as the recovery takes shape. While much of this is priced in, historical experience shows that the potential for growth from a rebounding economy can often be underestimated. While stocks have rallied sharply since the crisis of early 2020, we believe earnings could rise a good bit more.
If there is a concern for equity markets it is understanding how central banks will react to potential further upside surprises on economic growth. We continue to believe that central banks will continue to buy longer dated government bonds, even if purchases are tapered. We expect inflation to remain elevated in 2021 for longer given the rise in commodity prices and ongoing supply side constraints but to return towards target in 2022. As the central banks taper bond purchases, and provided the economy continues on the road to full employment with a winding down of the pandemic, reduced policy uncertainty and still elevated inflation, long-term interest rates should finally move up from extraordinarily low levels. As that occurs, funding for the most speculative investments in financial markets could become harder. This should lead to a compression in valuations, favouring value stocks over growth stocks.
However, we believe that equities should do well in an environment of modestly rising inflation, as rising sales tend to offset higher input prices which can be passed onto customers when demand is strong. We believe that performance across global stockmarkets should mostly follow earnings delivery. The cyclical environment should continue to favour value stocks due to their greater economic exposure and higher operating leverage.
Katy Thorneycroft
Gareth Witcomb
Investment Managers, JPMorgan Multi-Asset Growth & Income 18th October 2021
INTERIM MANAGEMENT REPORT
The Company is required to make the following disclosures in its Half Year Report:
Principal Risks and Uncertainties
The principal risks and uncertainties faced by the Company fall into five broad categories: investment and strategy; accounting, legal and regulatory; corporate governance and shareholder relations; operational; and financial, including the risk of global pandemics. Information on each of these areas is given in the Company’s Strategic Report within the Annual Report and Financial Statements for the period ended 28th February 2021.
Related Parties Transactions
During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.
Going Concern
The Directors believe, having considered the Company’s investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, and the economic and operational impact of Covid-19 that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties relating to the Company that would prevent its ability to continue in operational existence for at least 12 months from the date of the approval of this interim financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.
Directors’ Responsibilities
The Board of Directors confirms that, to the best of its knowledge:
(i) the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with FRS104 ‘Interim Financial Reporting’ and gives a true and fair view of the assets, liabilities, financial position and net return of the Company as required by the UK Listing Authority Disclosure and Transparency Rules (‘DTR’) 4.2.4R; and
(ii) the interim management report includes a fair review of the information required by DTR 4.2.7R and 4.2.8R.
In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;
and the Directors confirm that they have done so.
For and on behalf of the Board
Sarah MacAulay
Chairman 18th October 2021
