Fund manager Jeroen Huysinga and chairman Nigel Wightman explain how a double whammy of world economic recovery and a new dividend policy helped JPMorgan Global Growth & Income (JPGI) swing from a steep discount to a small premium, allowing the investment trust to start issuing shares for the first time in a long while.
With the exception of Google-owner Alphabet, Huysinga says he is wary of the US technology titans that have led the US stock market higher. However, although he has cautiously removed the trust's gearing, or borrowing, he anticipates a short-term correction rather than a full-scale market crash in 2018.
Wightman discusses the board's decision to start paying some of its 4% dividend from capital. Rather than increasing the risk to shareholders, he claims it helps reduce risk by not forcing the fund manager to buy high-yielding stocks.
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Gavin Lumsden: Hello, with me today are two of the key people at JPMorgan Global Growth & Income, an investment trust that has delivered sharply improved performance since announcing a new dividend strategy last year.
They are Jeroen Huysinga, the fund manager, and chairman Nigel Wightman. Gentlemen, thank you very much for joining me. Jeroen, I’ll start with you. You’re in charge of the portfolio obviously. There’s been quite an improvement, increase in net asset value since the announcement the trust would pay a 4% dividend going forward. What has driven that?
Jeroen Huysinga: You’ve got to think about the events that preceded that announcement because if you think about the end of June last year  we had Brexit. At the beginning of that year we had some degree of global turmoil. In fact we think there was an industrial recession going on.
Gavin Lumsden: Oil price had been low, China was going through a difficult period.
JH: Yes. Twenty seven dollars. If you think about it there was a long age of caution that went back five, seven years. You had the eurozone crisis in 11, you had the global financial crisis obviously in 08 and 09 and as we went into the third quarter of last year [2016), we really started to see an acceleration in this globally synchronised recovery and that’s had really important implications for earnings globally, earnings revisions and that’s what’s pushed these markets up.
GL: How concerned are you about a correction? I see you’ve reduced gearing, the amount of borrowing in the trust, to zero.
JH: You’re right, after a five or six-year period we took borrowing down to zero but we’re not saying we think these markets are going to collapse in a heap.
GL: Because that’s quite a classic defensive move isn’t it? To take your gearing off the table in case things fall back.
JH: Sure. But all we’re seeing is quite a lot of complacency, quite a lot of crowding in certain specific areas of the market. And if you look back through history a good market can nevertheless be interrupted by a sharp 5-10% correction. And all we’re doing is bracing ourselves for that eventuality.
GL: So you’re anticipating maybe a short-term dip of some kind but not a long-term bear recession?
JH: No. We think a long-term bear recession will be caused by too much inflation and an excessive response from central banks and we think we’re at least 18 months to two years away from that.
GL: You avoid most of the big US tech stocks that have driven a large part of the gains in America. The so-called FAANG stocks which are Facebook, Apple, Amazon, Netflix and Google. The only one of those you’ve got, I was reading in your report, is Alphabet the owner of Google. Why is that?
JH: Well we don’t avoid those stocks as a matter of principle.
GL: But they’re expensive?
JH: Yes. And we look for a combination of valuation and growth. I should say that very rarely does a group of stocks that really leads the charge in the manner that these names have this year – up to a quarter in the increase in the S&P can be traced to these names. That rarely spills over into the next period. But on Google we still like that, it’s still one of our largest positions. We think there is a lot of underappreciated growth, their core search business recently had the highest growth rates in five years and there is loads of underappreciated stuff like Waymo, which is autonomous driving. They do a lot of AI, which is artificial intelligence. We think Youtube revenues have yet to reaccelerate. They do very good and underappreciated activities in the Cloud, so actually for its growth this stock is still extremely cheap and that is why it remains one of our largest positions.
GL: Jeroen, thanks for the update on the portfolio. If I can turn now to you Nigel. You’re here to talk about this dividend policy. Jeroen has done a good job on the portfolio, the net asset value is going up. At the same time the share price has gone up even more so my first question to you is this policy of paying a 4% dividend. Hast that been the main driver of the share price or has it been a bit of both?
Nigel Wightman: I think there are three things at work here. Yes the dividend policy has been very well received.
GL: Because last year your shares were trading at an 18% discount to NAV and now they’re just above it.
NW: Yes indeed, we are now trading at a small premium.
GL: So the capital growth has been good and then you’re telling investors that you’ll be paying them a 4% dividend going forward …
GL: … and that’s a big increase from what you were paying before so, how does that actually work because the significance of the new policy was you were saying you would pay it from capital reserves.
GL: Not totally from the income being generated from Jeroen’s investments.
NW: That’s exactly right, we don’t set Jeroen any income target. I mean I guess you know approximately we would expect from the portfolio he tends to own we would get net income of let’s say 1.5% or something like that. And then we will top that up from capital returns to get 4%.
GL: The 2.5% has to come from selling some of your holdings?
NW: Correct. So if you think of it as somewhere between 30 and 40% comes from income that’s coming in and the balance comes from capital returns. Yes it’s 4% based on the NAV at the close of the past financial year and we distribute that at 1% a quarter.
GL: OK now as a result of this change you’ve moved sector, moved category. You’re now in the Global Equity Income sector and that kind of makes sense because you’re generating this income, on the other hand you’re saying that Jeroen’s strategy hasn’t changed and it’s still largely about growth. I think some people would find there’s a bit of a tension, contradiction there.
NW: Well yes and no. So the AIF categories global equity funds like ours into one of two places. They either say you’re a growth fund or an income fund. The actual decision on which you’re in is just effectively based on your distribution, it’s not really based on your investment style. I mean to call Jeroen’s style pure growth is a kind of over simplification but it is true that prior to the distribution change we were kind of in this box and post the distribution change, because our distribution has gone up we have moved over here. In practice we think we’re a hybrid with people buying our trust effectively getting the best of both worlds.
GL: What do you say to shareholders who worry that the new dividend policy will increase risk of capital losses in a down turn? Because markets have been benign for your first year of this policy. What happens if markets fall? If you’re taking 4%, or 2.5% of capital out doesn’t that exaggerate the losses they might be experiencing?
NW: So before we made this change you know we did a whole lot of analysis of long-term returns in markets and you know we were comfortable that over the long term adopting this sort of policy was perfectly prudent and sensible and wouldn’t investors’ money at risk in the long term. You’re quite right that markets go down as well as up and so there will be down – we’ve had a very strong up market last year – at some point we will have down markets as well.
Having said that I think we look at risk sort of differently. I mean, as you probably know, in the world of long-term endowment management, so people like Yale, Harvard and so on, they basically take a long-term view of how they maximise their wealth and then they take a completely separate view of what distribution to pay. And that’s essentially what we’ve done.
You know, we have said to Jeroen, ‘maximise the value of this trust, the best stocks you can on a global basis, and we will separately decide what distribution we should make to shareholders. We think doing that way round makes sense. Doing it the opposite way round, which is saying OK let’s find the distribution we think our clients want and then tell our fund manager to buy stocks that pay that dividend or more. We think that’s the wrong way round because we think that takes you into areas of the market that may well be very risky.
GL: Nigel, thanks very much for explaining that to me and Jeroen good to hear from you too. Gentlemen, thank you.