JPMorgan Asia Growth and Income (JAGI) aims to provide investors with both capital growth and income by investing in some of the best ideas across Asia (ex-Japan).
The Company differs from its peers as its managers adopt dual perspectives to identify the region’s most compelling investment opportunities. They consider the ‘big picture’ – the economic performance of various countries within the Asian region, and the outlook for particular industries. But they pay equal attention to the detailed fundamentals of individual companies, and target only quality companies with competitive advantages, strong profitability, low debt, and a capacity to grow and generate positive returns over many years. These differing perspectives, supported by JPMorgan’s deep, on-the -ground research resources, provide the managers with additional insights and ideas relative to other managers focused solely on individual (‘bottom-up’) stock picking.
Digitalisation and the growth of Asia’s middle classes predicted to drive future investment performance
The growth prospects of the companies JAGI owns are often supported by long-term structural trends such as digitalisation and the rise of Asia’s middle classes. As elsewhere, digital technologies are permeating all spheres of daily life across the region and disrupting traditional, often inefficient industries. Some of the largest companies in the region are focused on e-commerce, internet content, video steaming and gaming, while the convenience of online banking and payment systems is driving the expansion of companies offering these services. In the commercial world, factory automation and robotics, data processing and the digitalisation of administrative processes are increasing productivity and profits. Many of JAGI’s holdings, such as China’s internet content giant Tencent, online retailer Meituan, Taiwan Semiconductor Manufacturing Company, and IT services provider Infosys are at the cutting edge of the digitalisation trend. The portfolio also has exposure to the myriad opportunities created by Asia’s burgeoning middle classes. Incomes are rising across the region, and this is generating demand for a wide variety of consumer goods and services, including cars, dining out, tourism, banking, insurance and healthcare. Holdings such as Samsung Electronics, Maruti Suzuki, restaurant chain Yum China, travel website Trip.com, and pan-Asian insurer AIA are all set to benefit from rising household incomes and aspirational spending.
A contrarian view on China
Proactive, high conviction investment management is another of JAGI’s defining characteristics. Its managers are not afraid to hold strong views on particular countries, sectors, or stocks, and to back their convictions by taking bigger or smaller positions relative to the benchmark, sometimes in defiance of general market consensus. Their view on China is one notable example of this active management approach. While most investors are presently bemoaning the ‘sluggishness’ of China’s post-pandemic recovery, and worrying about China’s property market, JAGI’s managers are optimistic about the country’s medium-term growth prospects. They argue that although China is set to grow more slowly than before the pandemic, forecast growth of around 5% this calendar year and next is still very strong in absolute terms and relative to the insipid growth projections of the major western economies.
This upbeat assessment is reflected in the stocks held in the portfolio – exposure to China and Hong Kong is one of the Company’s largest overweights, manifest via above benchmark positions in companies such as Tencent, and AIA, mentioned above, and Hong Kong Exchanges and Clearing. And the managers are looking to gain greater exposure to China’s recovery, especially in sectors benefiting from rising demand for outbound tourism. They have made recent investments in Thai airports, and hospitals set to benefit from medical tourism.
Further examples of the managers’ proactive management style include above benchmark positions to Indonesia’s well-run banks, and to Korean tech stocks, and significantly below benchmark exposures to Taiwan and India, markets the managers view as excessively expensive.
Quality is a key focus
JAGI’s focus on high quality companies, with robust balance sheets and strong growth prospects, means that while, on average, holdings tend to be more expensive than the market, their debt levels are much lower than the market average - an especially reassuring characteristic in the current, rising rate environment. For the managers, the calibre of a business’s management team and governance are additional, essential measures of its quality. They favour companies with clear, well-executed business strategies, transparent governance practices and a willingness to return excess cash to shareholders in the form of higher dividends and share buybacks.
Performing through recent bumpy times
The effectiveness of the managers’ proactive, high conviction approach and their focus on growth and quality can be measured by the Company’s long-term outperformance. It has generated an average annual return of 8.5% per year on an NAV basis, over the ten years to end September 2023, decisively above the average annual benchmark return of 6.5% over the same period. And this performance has been consistent over time – JAGI has managed outperformed the benchmark throughout a variety of market conditions encompassing wide fluctuations in market returns and a variety of challenges including a global pandemic, war in Eastern Europe, geo-political tensions between China and the west and aggressive interest rate increases. This should offer shareholders some confidence in the trusts ability to navigate market fluctuations, while providing regular income, in the year ahead.