Current portfolio positioning
The arrival of effective vaccines in late 2020 greatly improved the economic outlook and the prospects of cyclical companies severely affected by the pandemic. Many of these companies were trading well below their intrinsic value, prompting JGGI’s managers to trim exposures to some of the biggest ‘structural winners’ of the pandemic such as major, expensive tech names and semiconductor producers, and pivot into more attractively priced cyclicals such as Lyft, the US’s second largest ride sharing company, several restaurant chains and other names exposed to the return of leisure travel, including budget airline Ryanair and Airbus, the French aircraft manufacturer which is taking market share from Boeing, Mastercard and Booking.com. They also increased exposure to banks, in anticipation of eventual rises in interest rates, which will improve bank margins, and industrial names such as Schneider Electric, a French energy management and industrial automation company.
The managers have characterised these acquisitions as ‘leaning into the recovery’, and they continue to do so. Many of the cyclicals acquired over the past year have done very well, prompting them to take some profits. For example, they trimmed Norfolk Southern, a US rail company and sold a long-term holding in O'Reilly Automotive, a US supplier of car parts and accessories, whose valuation was looking very stretched. The managers also sold Comcast, a US cable TV company on valuation grounds, replacing it with Charter Communications, another, more attractively priced cable company. A position in Ryanair was also closed, as the company has less scope that its competitors to absorb rising fuel costs.
However, as discussed above, many other solid companies are yet to realise the full benefit of the reopening and recovery and remain undervalued accordingly, especially after the recent market sell-off. These are the businesses now being targeted by Woodhouse and his colleagues. Recent acquisitions include McDonald's and Marriott Hotels (now a top 10 holding), whose franchise structures provide steady fee income and protection from wage pressures. The trust’s exposure to American Express has been increased (also now a top 10 holding), on the view that higher inflation will bolster revenues. The managers have also increased the position in Booking.com, as they consider this a ‘world leader’ in accommodation and other travel services.
Exhibit 2: Top 10 holdings (at 31 March 2022)
|
|
|
Portfolio weight % |
Company |
Country |
Sector |
28 March 2022 |
29 March 2021* |
Amazon |
US |
Media |
5.6 |
3.9 |
Microsoft |
US |
Tech - software |
5.1 |
4.3 |
American Express |
US |
Banks |
2.9 |
N/A |
LVMH |
French |
Retail |
2.7 |
N/A |
Bank of America |
US |
Banks |
2.3 |
N/A |
Mastercard |
US |
Financial Services |
2.2 |
2.5 |
VINCI |
France |
Industrial cyclicals |
2.2 |
N/A |
NXP Semiconductors |
Netherlands |
Technology - semi & hardware |
2.2 |
3.1 |
Norfolk Southern |
US |
Transportation |
2.1 |
N/A |
Marriott |
US |
Consumer cyclicals |
2.1 |
N/A |
Top 10 (% of portfolio) |
|
|
29.4 |
31.1 |
|
Source: JPMorgan Growth & Income, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in end-March 2021 top 10. **Parent of Google.
They have also recently acquired some new industrial cyclical names, including Ingersoll Rand, a US producer of specialist industrial machinery which the managers expect to benefit from a recent merger with its competitor Gardner Denver. They have also added to their exposure to US semiconductor manufacturers Lam Research Corporation and Texas Instruments, as demand for these products keeps improving. The war in Ukraine has prompted the managers to add a new position in Baker Hughes, a US oil and gas equipment services company, which is likely to see an increase in demand as western nations seek to reduce their dependence on Russian oil and gas.
The managers’ ongoing efforts to maintain exposure to the global economic reopening has ensured that several cyclical stocks feature in JGGI’s top 10 holdings (Exhibit 2). However, media and tech stocks are also well-represented in this list. Amazon, the internet retailing behemoth, is currently the trust’s largest position, following a recent top-up. The managers have a strong conviction in this company, which they view as a ‘best of the best’ premium company. Its retail business is still growing and expanding into new sectors and new regions, while its advertising revenues are benefiting from the services it provides to third-party sellers. This is an area of Amazon’s business which JGGI’s managers believe is underestimated by some investors. In addition, Amazon’s public cloud business is also compelling, providing companies with cost savings and lower emissions. The managers view Amazon’s earnings power as ‘unrivalled’ due to its almost unlimited scope for further expansion.
Exhibit 3: Portfolio sector exposure vs MSCI AC World index (% unless stated)
|
Portfolio end-Mar 2022 |
Portfolio end-Mar 2021 |
Change (pp) |
Index weight |
Active weight vs index (pp) |
Trust weight/ index weight (x) |
Pharma & medtech |
10.8 |
10.1 |
0.7 |
9.7 |
1.1 |
1.1 |
Media |
10.3 |
11.1 |
(0.8) |
9.1 |
1.2 |
1.1 |
Tech - semi & hardware |
10.2 |
11.8 |
(1.6) |
12.3 |
(2.1) |
0.8 |
Banks |
10.2 |
8.9 |
1.3 |
8.6 |
1.6 |
1.2 |
Industrial cyclicals |
8.1 |
9.8 |
(1.7) |
6.8 |
1.3 |
1.2 |
Retail |
6.4 |
5.4 |
1.0 |
5.3 |
1.1 |
1.2 |
Technology - Software |
6.3 |
4.3 |
2.0 |
7.7 |
(1.4) |
0.8 |
Consumer Cyclical & Services |
4.5 |
4.4 |
N/A |
2.2 |
2.3 |
2.0 |
Automobiles & Auto Parts |
4.1 |
5.2 |
N/A |
3.3 |
0.8 |
1.2 |
Energy |
3.6 |
0.0 |
3.6 |
4.4 |
(0.8) |
0.8 |
Others |
19.6 |
25.8 |
(6.2) |
30.6 |
(11.0) |
0.6 |
Cash |
5.9 |
3.2 |
2.7 |
0.0 |
5.9 |
N/A |
|
100.0 |
100.0 |
|
100.0 |
|
|
Source: JPMorgan Global Growth & Income, Edison Investment Research
At the sector level, technology – both hardware and software sectors – is the portfolio’s most significant underweight (Exhibit 3) as the managers view these sectors as generally overvalued, and vulnerable to valuation corrections as interest rates rise. Conversely, the managers’ ongoing efforts to lean into the recovery mean that the portfolio has significant overweights to consumer cyclicals and services, banks, industrial cyclicals, retail and automobiles.
Exhibit 4: Portfolio geographic exposure vs MSCI AC World Index (% unless stated)
|
Portfolio end-Mar 2022 |
Portfolio end-Mar 2021 |
Change (pp) |
Index weight |
Active weight vs index (pp) |
Trust weight/ index weight (x) |
North America |
67.8 |
64.9 |
2.9 |
61.4 |
6.4 |
1.1 |
Europe & ME ex-UK |
20.9 |
24.5 |
(3.6) |
12.1 |
8.8 |
1.7 |
Emerging markets |
3.2 |
3.9 |
(0.7) |
11.1 |
(7.9) |
0.3 |
Japan |
1.4 |
1.8 |
(0.4) |
5.4 |
(4.0) |
0.3 |
Pacific ex-Japan |
0.8 |
0.0 |
0.8 |
3.1 |
(2.3) |
0.3 |
United Kingdom |
0.0 |
1.7 |
(1.7) |
3.7 |
(3.7) |
0.0 |
Canada |
0.0 |
0.0 |
0.0 |
3.2 |
-3.2 |
0.0 |
Cash |
5.9 |
3.2 |
2.7 |
0.0 |
5.9 |
N/A |
|
100.0 |
100.0 |
|
100.0 |
|
|
Source: JPMorgan Global Growth & Income, Edison Investment Research
In terms of JGGI’s geographical positioning, the portfolio’s heaviest overweight is to Europe ex-UK, (Exhibit 4), where the managers believe companies, particularly European banks, are attractively valued relative to the US and other markets, especially after the recent sell-off (see Exhibit 1, right-hand side). The trust also has a lesser overweight to the US. Its largest underweight is to emerging markets, where the managers remain ‘very cautious’. The portfolio no longer has any direct exposure to China, as the managers have sold positions in Chinese names including Alibaba, an internet retailer and Tencent, an internet content and information company, due to increasing concerns about the Chinese government’s regulatory crackdown and the market’s mounting scepticism about the government’s commitment to growth. This lack of exposure ensured that the portfolio avoided the pain of the recent sell-off in the Chinese market.
JGGI also has no direct exposure to Russian or Ukrainian listed companies, and less than 1% of portfolio revenue is derived from these markets. The managers recently opened a position in Carlsberg, a well-run Danish brewing company, which is Russia’s largest brewer. Carlsberg’s shares sold off sharply following the Russian invasion, but JGGI’s managers believed this sell-off was excessive, as they expect the economic impact of the war to be manageable for Carlsberg. The company has since announced its withdrawal from the Russian market, and the share price has made a partial recovery.
The trust’s managers are keen to stress that the underweight to emerging markets is not as significant as it appears, as many portfolio holdings, especially in Europe, have significant exposure to China and other emerging markets. For example, they have recently increased a position in LVMH, a French luxury goods manufacturer, when the stock sold off to attractive levels. This company has a significant exposure to Chinese consumer demand and is now a top four holding. The managers cite their holding in Schneider Electric as another example of this indirect exposure to emerging markets. They believe this company is the ‘best sustainable company in the world’, thanks in large part to its contribution to the development and management of EV charging grids, and they expect the company to double its global earnings over the next five years.
JGGI’s portfolio remains relatively concentrated, with the top 10 holdings representing almost 30% of the portfolio at end March 2022. Portfolio turnover at end March was 71%, within the trust’s usual 60–80% range, with most transactions relating to the management of the position sizes of existing holdings, according to the managers.
In all, Woodhouse and his colleagues believe they have a well-balanced portfolio focused on quality companies spread across a variety of sectors and regions, with exposure to both the ongoing recovery and to long-term structural trends. In addition, they are confident that JPMorgan’s research resources will continue to identify other exciting and attractive investment opportunities from the broad global opportunity set, making them ideally positioned to build on the trust’s short- and longer-term success.