How to benefit from the longest bull run ever and cope with share price volatility - J.P. Morgan Asset Management
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How to benefit from the longest bull run ever and cope with share price volatility

Contributor Ian Cowie

Is there still time to join the longest bull run - or period of rising share prices - on record? While many bank and building society deposits fail to keep pace with inflation (Which? Best savings rates of 2019 26.04.19), the average conventional investment trust delivered share price returns of 7% over the last year (Morningstar via Association of Investment Companies).

The past is not necessarily a guide to the future and share prices can fall without warning. However, the history of the last century and more shows that anyone who could remain invested in shares for five consecutive years at any time since 1899 had a three-in-four historical probability of receiving greater rewards than cash depositors (Barclays Equity Gilt Study 2019).

More recently, since share prices began to recover from the global credit crisis in 2009, medium to long-term investors received share price returns of 82% over the last five years and an eye-stretching 330% over the last decade, according to the Association of Investment Companies (May 6 2019). While the future remains unknowable, investment trusts such as JPMorgan Claverhouse Investment Trust plc can be proud of their record of raising dividends every year for 46 years (AIC 12.03.19).

HOW SHARE PRICE VOLATILITY CAN HELP

Many stock markets fell sharply during the global credit crisis but have bounced back strongly since then. Did you get your share of that recovery? For example, the Standard & Poor’s 500 index - a broad measure of the American market, the largest in the world - reached a low-point of 677 in March, 2009, since when it has quadrupled (Yahoo! Finance S&P 500 long term chart 06.05.19).

During the same period, the FTSE 100 index of Britain’s biggest shares has more than doubled from a low-point of 3,542. Decisive action by governments around the developed world, including cutting interest rates and keeping them lower for longer than many observers expected, reduced returns to depositors in bank and building society accounts but helped to increase returns to stock market investors.

WHAT MIGHT HAPPEN NEXT?

The past is not necessarily a guide to the future and share prices can fall without warning. In addition to economic factors, such as changes in gross domestic product (GDP) - a measure of national output - or interest rates, stock market valuations can be affected by human emotions. For example, fear and greed, pessimism and optimism, can drive share prices down or up.

Technological developments - such as inventions and improvements in efficiency - tend to make the economy grow over time. But investors’ optimism or pessimism about the future may fluctuate in a cyclical fashion, varying between pessimism when confidence and share prices are low to optimism when confidence and share prices are high. But historical evidence suggests it pays to avoid short-term emotion to gain from medium to long-term economic growth.

WHY IT PAYS TO TAKE A MEDIUM TO LONG-TERM VIEW

One of the most comprehensive analyses of various assets, or ways of storing wealth and making it grow over time, examined returns from shares reflecting the changing composition of the London Stock Exchange and cash deposits since 1899 (Barclays Equity Gilt Study page 101, figure 8). If shares were held for two consecutive years, there was a 69% probability of them delivering a higher return than cash. So, over any two-year period, there was a better than two-in-three chance that shares would beat deposits. Put another way, there was nearly a one-in-three chance that cash might do better than shares.

However, if shares were held for five consecutive years, the risk that stock markets might be temporarily depressed was reduced and the historic probability of shareholders receiving higher returns than depositors increased to 76% - or better than one-in-four. That is why it is sometimes said that five years is the minimum period over which stock market investment should be considered. Over 10 consecutive years, the historic probability that shares would do best increased to 91% (Barclays Capital Equity Gilt Study 2019 pg. 101).

HOW INVESTMENT TRUSTS MINIMISE RISK AND MAXIMISE REWARDS

Investment trusts are one of the oldest forms of pooled fund, bringing many individual investors’ money together to share the cost of professional management and invest in dozens of different companies and - in the case of international funds - different countries. The aim is to diminish the risk inherent in stock markets by diversification.

Since 1868, investment trusts traded on the London Stock Exchange have enabled investors of all sizes to gain exposure to income and growth opportunities in Britain and overseas. More recently, since share prices began to recover from the global credit crisis in 2009, medium to long-term investors received share price returns of 82% over the last five years and 330% over the last decade, according to the Association of Investment Companies (06.05.19).

RISING INCOME AND CAPITAL GROWTH

While the future remains unknowable, investment trusts such as JPMorgan Claverhouse Investment Trust plc can be proud of their record of raising dividends every year for 46 years. That means this fund - which aims to provide a combination of capital and income growth, mostly from companies listed on the London Stock Exchange - succeeded in increasing dividend distributions throughout a period spanning several wars and stock market crashes.

Over the last five years, JPMorgan Claverhouse Investment Trust plc has increased its dividend from 20p per share in 2014 to 27.5p in 2018 (Association of Investment Companies, 06.05.19) and its yield - or the income it pays expressed as a percentage of its share price - is currently 4%. Dividends are distributed to this investment trust’s shareholders four times a year - in March, June, September and December. Meanwhile, JPMorgan Claverhouse Investment Trust’s total share price return was 41% over the last five years and 216% over the last 10 years (Barclays Equity Gilt Study 2019 06.05.19). Alternatively, JPMorgan Global Growth & Income plc enables shareholders to benefit from the best ideas from around the world with a predictable quarterly income. JPMorgan Global Growth & Income plc yields 3.9% and delivered total returns of 101% over the last five years and 297% over the last decade.

WHY TIME IN THE MARKET MIGHT BEAT TIMING THE MARKET

Share prices are volatile and it is impossible to predict with certainty whether they will rise or fall in the short-term. As discussed earlier, investor sentiment may fluctuate between fear and greed, driving prices down or up. Sometimes the best days for rising share prices follow soon after share prices have fallen, so short-term speculators who duck in and out of the market run the risk of missing some of its potential returns.

For example, someone who invested £1,000 in the FTSE All Share index 30 years ago could have enjoyed an annualised return of 8.7% and a final fund value of £12,146 if they had stayed in the market the whole time (Fidelity International 06.05.19). By contrast, if this investor missed just the best 10 days in the market during the last three decades, he or she would have received an annualised return of 6.4% and ended up with a total fund value of £6,496 – that’s a difference of £5,650. If this investor had missed the best 30 days - equivalent to an average of missing just one day per year during this period - then their annualised return would have plunged to 3.6%, reducing their final fund value to £2,927. That is why it is sometimes said that time in the market is more likely to build wealth than attempting to time the market.

Many stock markets have recovered strongly since the global credit crisis more than a decade ago to create the longest bull run - or period of rising share prices - on record. Stock market investors have benefited from low interest rates, while these reduced returns to bank and building society depositors.

But share prices are volatile and can fall without warning. Investment trusts diminish the risk of stock market investment by diversification and sharing the cost of professional fund management. Investing over the medium to long term - that is, over five years or more - is least likely to be affected by short-term volatility and most likely to produce satisfactory results. Ducking in and out of shares may mean you miss some of their potential returns. Time in the market is a safer path to wealth creation than trying to time the market.

Investors should remember that share prices can fall without warning and that you may get back less than you invest. However, investment trusts seek to diminish the risk inherent in stock markets by diversification and professional fund management. There are hundreds of investment trusts to choose from. For more details see the Association of Investment Companies.

JPMorgan Claverhouse Investment Trust plc – Investment Objective

To provide superior total returns and outperform the MSCI All Country World Index over the long-term by investing in companies based around the world. The Company makes quarterly distributions that are set at the beginning of each financial year. On aggregate, the intention is to pay dividends totalling at least 4% of the NAV at the time of announcement. The manager is focused on building a high conviction portfolio of typically 50 90 stocks, drawing on an investment process underpinned by fundamental research. Portfolio construction is driven by bottom up stock selection rather than geographical or sector allocation. Currency exposure is predominantly hedged back towards the benchmark. The Company uses borrowing to gear the portfolio within a range of 5% cash to 20% geared under normal market conditions. The Company will repurchase its shares with the aim of maintaining an average discount of around 5% or less calculated with debt at par value.

Risk profile
  • Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.
  • Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. Shares may also be traded less frequently than those on established markets. This means that there may be difficulty in both buying and selling shares and individual share prices may be subject to short-term price fluctuations.
  • Where permitted, a Company may invest in other Investment Funds that utilise gearing (borrowing) which will exaggerate market movements both up and down.
  • This Company may use derivatives for investment purposes or for efficient portfolio management.
  • External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
  • This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
  • This Company may also invest in smaller companies which may increase its risk profile.
  • The share price may trade at a discount to the Net Asset Value of the Company.
  2014/2015 2015/2016 2016/2017 2017/2018 2018/2019
Share price 22.10% -7.56% 47.73% 9.22% 5.08%
NAV 20.96% -3.97% 40.52% -0.38% 7.97%
Benchmark 18.39% -1.20% 32.23% 2.37% 10.45%

Past performance is not a guide to current and future performance. The value of your investments and any income from them may fall as well as rise and you may not get back the full amount you invested.

Source: J.P. Morgan Asset Management/Morningstar. Net asset value performance data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP.

NAV is the cum income NAV with debt at fair value, diluted for treasury and/or subscription shares if applicable, with any income reinvested. Share price performance figures are calculated on a mid-market basis in GBP with income reinvested on the ex-dividend date. The performance of the company's portfolio, or NAV performance, is not the same as share price performance and shareholders may not realise returns which are the same as NAV performance.

Indices do not include fees or operating expenses and you cannot invest in them.

Benchmark Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved, in or related to compiling, computing, or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.

Comparison of the Company's performance is made with the benchmark. The benchmark is a recognised index of stocks which should not be taken as wholly representative of the Company's investment universe. The Company's investment strategy does not follow or track this index and therefore there may be a degree of divergence between its performance and that of the Company.

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Important information

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Investor Disclosure Document, Key Features and Terms and Conditions and Key Information Document can be obtained free of charge from JPMorgan Funds Limited or www.jpmam.co.uk/investmenttrust.

This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. 0903c02a82598057