William Meadon, joint portfolio manager of JPMorgan Claverhouse Investment Trust plc (JCH), is excited about the trust’s prospects and he has three good reasons to be so.
First, Claverhouse is invested wholly in the UK market – the cheapest developed market in the world, after seven years persistently out of favour with global investors. As growth stocks have struggled and a value-based investment approach has finally returned to the limelight, the UK’s value-heavy stock market “feels exactly the right place to be,” Meadon says.
He is feeling particularly upbeat this year as Claverhouse celebrates 50 years of consecutive dividend increases, the longest of any UK-focused investment trust. Over the half-centenary, this ‘dividend hero’ has achieved compound annual dividend growth of 8.8% – far outpacing the FTSE All-Share’s 6%, and far more reliably too.
But the managers are adept at repositioning as needed: the second half of last year saw rapid recovery and Claverhouse shares gaining 10%, twice the gains of the FTSE All-Share. Share price growth is further bolstered by a meaty dividend yield, currently around 5%.
The portfolio is 90% invested in blue-chip stocks across a range of both growth and value sectors, adopting a barbell approach to provide the balance needed for a prudently managed core holding. “The aim is for it to be a classic ‘get rich slow’ portfolio,” observes Meadon.
Thus, on the growth side of the equation it currently holds a range of technology-focused ‘market share gainers’ such as industrial equipment rental business Ashstead and IT infrastructure provider Softcat, alongside companies involved in the transition to renewable energy (SSE, Drax) and pharmaceutical leaders (AstraZeneca).
Value holdings include miners such as Glencore and Anglo American, oil companies (BP and Shell) and banks (NatWest and Lloyds) - all sectors currently enhanced by low valuations, healthy balance sheets and robust dividend payments.
In fact, the make-up of the portfolio has changed little since the middle of 2022. Energy, insurance, banks and miners remain the biggest overweight positions, though they have recently been joined by retailers as the managers have opportunistically added to holdings in JD Sports and Next.
Meadon’s co-manager Callum Abbot picks out oil and gas as one of the most interesting, challenging and value-rich sectors in which the trust is invested. “Many of our peers have refused to hold energy for a long time, and that has previously served them well,” he says.
“But we took a contrarian overweight position in May 2020 in the depths of the pandemic, reflecting the outstanding value at that time.”
Oil companies were then trading at about half the long-term average in terms of metrics such as the price to book ratio; moreover, they were showing large free cash flow yields (which show the relationship between a company’s available cash to return to shareholders and its share price), even on the then very low forecast oil prices.
In addition, capital investment in the sector had been reduced since about 2015, so supply was likely to be tight as and when demand eventually picked up.
“In the event, that’s exactly what we saw driving up the price of oil as the world emerged from the pandemic, alongside fantastic free cash flow yields as share prices rose,” Abbot says. “Our investment was a bold move, but it’s really paid off over the past two years.”
Yet there is potential for more to come from the sector, he believes. To put that into perspective, Shell and BP now have free cash flow yields of around 20%, compared with US peer Exxon Mobil’s 13%, because these UK stocks remain undervalued compared with their international competitors.
So when might the UK’s many world-class businesses finally see a rerating? Meadon points to the dread duo of price inflation and the rising interest rates invoked to bring it under control. UK and US inflation appears to have peaked in autumn last year – but although the trend is downwards, it’s a slow burner.
Interest rates are bound to increase further before they start to fall as inflation is controlled, says Meadon; “but once the market can anticipate the peak, we’d expect a sharp rally for broader UK equities.”
Meanwhile, though, Claverhouse’s share price, which sat stubbornly on a premium to the trust’s net asset value for much of last year, has widened to a discount of around 6% (a result of the merger of JPMorgan Elect (JPE) with JPMorgan Global Growth & Income, when JPE’s holdings, including shares in Claverhouse, were sold as part of the restructuring).
“That stock has now been placed, but there’s still some indigestion in the market and JCH’s discount is as wide now as it has been since 2020,” Meadon notes. It amounts to a potentially rare opportunity for would-be Claverhouse investors to position themselves for better times ahead for the UK market.