Canaccord Genuity analysts have upgraded their rating on JPMorgan American (JAM) after the investment trust last week dropped long-standing fund manager Garrett Fish and announced plans for a new strategy.
Alan Brierley, who has been negative on the £925 million listed fund for four years due to its inability to convincingly beat the US stock market, lifted his ‘sell’ recommendation to a ‘hold’, saying he welcomed its ‘belated move to a higher-conviction approach’.
Fish, who had run the dominant large-company part of the US portfolio for 17 years using a value-driven behavioural finance analysis to determine buying opportunities, is being replaced by two senior fund managers: Jonathan Simon, who will pick stocks using a value style, and Timothy Barton, a growth investor.
Under their joint ‘equity focus’ process the pair will run a more concentrated list of 30-40 stocks compared to the current 60 plus.
Brierley said the duo had successfully run a Luxembourg open-ended fund for two years using this process. He said they had beaten the S&P 500 with an annual gain before fees of 8.6% versus the index’ 6.3%.
The trust is also overhauling the fees paid to JP Morgan. It is scrapping a performance fee paid if the fund manager beats the US index and taking a nine-month break from paying its base annual management charge to make up for earlier underperformance.
When the trust resumes payments in a year’s time, it will do so on a new tiered basis, paying 0.35% a year for the first £500 million of net assets, falling to 0.3% and 0.25% on amounts above £500 million and £1 billion.
‘Although the adoption of a “higher-conviction” approach is no panacea, the company finally appears to have taken action to escape the clutches of “closet tracking”. JP Morgan has significant depth of resource, and given this increased portfolio flexibility, it is now time to deliver,’ said Brierley in a note with analyst Ben Newell entitled ‘The great escape?’.
‘If the company fails, then the next change may be more significant. We believe there is appetite for a balanced US fund, but having purchased 64 million shares in the past four years to address a supply/demand imbalance, the company must now convince investors that the new strategy can deliver superior long-term returns,’ the analysts warned.
Shareholders will vote on the plans in Many while Fish prepares to take on a client-facing role at JP Morgan Asset Management.
Market reaction to the changes has so far been muted. JPMorgan American shares have dipped from 434p to 424p since the announcement last Wednesday. The discount – or gap between its share price and underlying net asset value – has widened from 3% to 6%, according to Morningstar. Over five years, its total shareholder return of 93% lags the 108% growth in the S&P 500.