JPMorgan Claverhouse Investment Trust plc (JCH) has been helping investors access the income and growth potential of the UK stock market since 1963. Co-portfolio managers William Meadon and Callum Abbot explain why the trust’s high conviction portfolio of UK mid and large-cap stocks is positioned for future returns and dividend growth through the market cycle.
Core UK equity exposure
JPMorgan Claverhouse aims to provide attractive returns and a growing income from a focused portfolio of UK stocks. While past performance isn’t a guide to the future, the company has a strong track record, generating a 9.5% annualised share price return since adopting its current investment strategy in March 2012, compared to a 7% annualised return from the FTSE All-Share benchmark1.
The trust also continues to grow its annual dividend. Following the latest increase at the end of 2021, the dividend has now risen in each of the last 49 years. Over the last 10 years alone, dividends have grown by 5.2% per annum2 on average. Future dividends are supported by the company’s strong income reserves and a rigorous focus on quality dividend-paying stocks.
Focused on quality and sustainability
The company’s successful track record is founded on high conviction stock picking, based on rigorous bottom-up research. The focus is on attractively valued, quality companies offering resilient earnings, strong cash generation and attractive future growth prospects. Sustainability is also important to us, with environmental, social and governance factors fully integrated into all stock selection decisions. We emphasise engagement to try to encourage the companies that we invest in to be as good as they can be for all their stakeholders.
Crucially, when it comes to identifying stocks for the portfolio, it is not about looking for turnaround stories or buying heavily beaten-up stocks. Instead, we look for high quality, sustainable businesses that can deliver attractive growth through the market cycle.
Barbell approach smooths returns
One of the portfolio’s defining features is its barbell approach to growth and value. We know that growth or value stocks alone don’t work well all the time so, rather than trying to time changes in market leadership, we are careful to maintain a balanced exposure to both investment styles at all times. This barbell approach acts as an in-built risk control mechanism to immunise the portfolio against big style swings and this helps to provide smoother returns over time.
Opportunities in growth and value
The market backdrop may be challenging, but we are still finding many attractive opportunities across a broad range of sectors. Among growth stocks, we continue to favour digital names, such as Softcat3, an IT services provider, that is benefiting from a structural increase in corporate technology spending while also growing its own market share. Another attractive growth story is energy security, where we expect renewable energy providers, such as Drax3 and SSE3, to play a key role as the UK moves away from dependence on foreign gas imports.
We are also finding growth opportunities in niche financial services providers that are growing assets and are able to charge attractive fees. Private equity investor 3i Group3, for example, has demonstrated its ability to consistently grow its net asset value through the market cycle thanks to its focus on investments that it believes can double in value over their holding period. The stock remains attractively valued despite strong operational momentum and cash generation.
Among value stocks, we like the commodity sectors, where tight supply and the disruption caused by Russia’s invasion of Ukraine are driving up metals and oil prices. Several mining and energy stocks have focused on capital expenditure discipline for many years and are now generating lots of cash that we expect to be returned to shareholders. Oil producer Shell3 is a good example. The stock, which is the trust’s largest holding at around 10% of the portfolio, is expected to generate a cash yield this year of between 9% and 12%, and is enjoying a sharp increase in earnings, but continues to trade at a significant discount to the UK market and to international peers.
Shell PLC is attractively valued and is returning cash to shareholders
Further attractive value opportunities can be found in the housebuilders sector, where stocks such as Barratt Development3 and Persimmon3 are out of favour and trading at low valuations but are supported by strong demand for housing, tight end markets and strong balance sheets.
Income certainty in an uncertain world
Global geopolitical instability, tight supply chains and high inflation are headwinds to growth, but UK stock market valuations provide considerable support, with the MSCI UK trading at a near 50-year low compared to the MSCI World Index (based on price to earnings, price to book and price to dividend valuations). With the UK market also paying the highest dividend yield among major markets globally, UK stocks may provide a once in a lifetime valuation opportunity.
MSCI UK trades at a 40% discount to the MSCI world
Against this backdrop, JPMorgan Claverhouse Investment Trust plc offers focused access to the sectors and stocks that offer long-term value. The portfolio is finding opportunities in the UK market’s large oil and mining sectors, which provide natural inflation hedges, and maintains exposure to long-term opportunities in renewable energy, information technology, financial services and housebuilders among others.
In a challenging environment, the UK market provides room for the portfolio to take a much more defensive stance, if required, with a number of large defensive stocks to choose from such as those in the pharmaceuticals sector. The trust also has the opportunity to add risk as conditions change, including the use of gearing. Currently the portfolio is cautiously positioned and is just 4% geared, but gearing can be raised as high as 20%.
With its attractive and rising dividend providing a regular income, and with the access it provides to a diversified portfolio of value and growth opportunities across the attractively valued UK market, we believe JPMorgan Claverhouse Investment Trust plc is well positioned for the uncertainty that lies ahead.
Past performance is not a reliable indicator of future results
The Company aims to provide a combination of capital and income growth from a portfolio consisting mostly of companies listed on the London Stock Exchange. The Company’s portfolio consists typically between 60 and 80 individual equities in which the Manager has high conviction. The Company has the ability to use borrowing to gear the portfolio within the range of 5% net cash to 20% geared in normal market conditions.
- 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 and income 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.
- The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies.
1 Source: J.P. Morgan Asset Management, data from 1 March 2012 – 1 March 2022. Share price performance calculated on a mid-market basis in GBP with income reinvested on the ex-dividend date.
2 Source: J.P. Morgan Asset Management, as of 31 December 2021. Dividend growth is calculated as the compound annual growth rate of dividends paid by JPMorgan Claverhouse Investment Trust plc (excluding special dividends) over the period 2010 – 2021.
3 The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell