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Hello.
I'm Alexander Fitzalan Howard.
I've been at JP Morgan since 1986.
I've been running European equity portfolios since 1999,
and I've been involved with the JP Morgan European Growth
and Income Trust since the early 2000S.
Hi, my name is Zenah Shuhaiber.
I joined JP Morgan in 2005 and joined the investment teams
in 2007, managing multiregional portfolios.
I joined this investment trust co-managing
with Alexander in 2020.
The JP Morgan European Growth and Income Trust
goes all the way back to 1929, when
it started life as the London and Holyrood Trust.
It's been invested in European equities since 1988.
In 2006, it split into two separate portfolios, an income
share portfolio and a growth or core share portfolio.
But the interesting thing is that in February last year,
the two portfolios have merged.
Going forward, it will be run on the same basis as the growth
or core leg, but--
and this is the exciting bit-- the board have decided
to pay a 4% annual dividend.
So this means that we can use the investment trust structure
to pay that dividend without compromising the investment
strategy of the core portfolio.
In order to do this, we want to invest
in a core balanced portfolio that
can generate incremental returns through different market cycles
and in different market conditions.
To do this, we're looking for companies
that are high quality, are cheaper than the market,
and have better operational momentum than the market.
When we're looking at a company, we're
looking for various attributes.
First of all, we want to invest in quality businesses.
And for us, that means companies that
generate a good return on invested capital,
companies where earnings per share
translates into free cash flow, and companies
where we think the management are making sensible capital
allocation decisions.
In terms of valuation, it's important for us
to work out whether the market has already
discounted those prospects or whether there's an opportunity
still to make money.
And lastly, in terms of momentum,
it's really important that the company's operational momentum
is improving.
And one way of looking at that is
to see whether earnings per share estimates
are rising or being cut back.
Not all companies that we invest in
will have all those attributes.
But overall, the portfolio as a whole will always be cheaper
than the market, will always have better quality
than the market, and better momentum characteristics.
I think it's worth saying, also, because we are overweight
both value and growth within the portfolio, that
has been really helpful to performance
over the last few years.
We think the European equities is a very important asset class
and one to not be forgotten.
The market definitely corrected last year,
with European markets down around 9% in Sterling terms,
amidst a lot of bad news that happened within Europe.
But we need to remember a couple of key points
in terms of European companies, the first one
being that they're very global in nature.
When we look at our portfolio, for instance,
only around a third of the revenue
streams actually come from continental Europe,
meaning that the companies within the European universe
are far more linked towards what's
happening in the global economy rather than just simply
continental Europe.
The second one being how will they
play into longer-term themes and really exciting themes
that we can all think of that are
leading the future in the years to come.
So for instance, the energy transition,
or when we're thinking about the luxury consumer,
or even aging demographics.
So while we don't think that all the bad news is necessarily
out when we think about the macro situation within Europe,
we definitely think that the right time
to start looking at Europe is before that because markets
tend to bottom well before the bad news is out.
We think of three key features that
distinguish JP Morgan's European Growth and Income
Trust, the first one being the investment process.
It's a very disciplined investment process
that goes back many, many years.
When we think about how we achieve the returns that we
achieve, we really rest on two key pillars within JP Morgan
and really utilize the full breadth
of what we have within our quantitative research
capabilities as well as our fundamental research
capabilities, and by doing that, deliver a core portfolio
that is diversified by both stock as well as style.
The second one being the track record.
The track record is very long-term.
We have outperformed in the most recent years,
which is great news.
But even when we think about the long-term performance
of the investment trust, we have also demonstrated our ability
to outperform in a variety of different market environments,
be it value markets, growth markets, or even
up-and-down markets.
And then, finally, the third one is the dividend.
This makes it a very resilient and reliable source of income
for our key investors.
When we look at stock selection, we really
think of asking ourselves four key questions, the first one
being, is it a good business?
And by this, what we're thinking of
is thinking about things like profitability.
We look at measures like return on invested capital.
We also think about how variable those earnings and cash
flows are over time and whether the management team are making
good decisions in terms of capital allocation for things
like mergers and acquisitions or further CapEx.
The second question we ask is, is the company
attractively valued?
Valuation is incredibly important
and has been so for many, many years.
It had been a little bit forgotten
in the last couple of years or the last decade
or so, as investors focused a lot more on growth.
But for us, maintaining that discipline
has been very helpful in particular
in 2022, as we think that focusing on measures
such as price to earnings and free cash flow yield
is really powerful over the longer term.
The third question we ask ourself
is, is the momentum improving?
And by this, we're looking at both operational momentum
as well as just simply the share price momentum.
We think that companies that are doing well
will continue to do well in the future,
and the converse of that is also true.
And then, finally, the fourth question
is, is the business sustainable?
Now, this has been a really key issue in the last few years,
and it's definitely part of our investment process.
And we look at it, again, as we do for the other three
questions, in both thinking about quantitative approaches
and qualitative approaches in terms
of assessing whether a business is sustainable.
And really what we're trying to ascertain here is, is this
an opportunity?
Is this a risk?
Or is this something that we can consider
engaging with company management in terms
of assessing whether this is a good investment
opportunity for us?
When we look at our longer-term track record,
we can see that we have outperformed in both value
and growth markets.
We have also outperformed in both up and down markets.
In terms of thinking about the actual dividend
that our investors receive, that dividend yield
is set at the very beginning of the fiscal year,
meaning that is a very reliable and known amount of income
for the course of the year.
When we think about how do we deal with macro issues
from a portfolio manager perspective,
we actually try to not get too bogged down with everything.
As fund managers, we need to know what we are good at--
for instance, the stock selection piece--
versus the many different kinds of risks
that we might experience throughout the course
of the year.
We are still quite defensively positioned, but much less so
than, say, six months ago.
Last year, many of the defensive companies
within the market-- and I'm thinking
the pharmaceutical sector, for example,
or consumer staples companies, food and beverage companies,
that sort of thing-- performed really well.
But as a result, many of them are now quite expensive.
In contrast, on the cyclical side, a lot of those companies
did not perform so well and have really become quite cheap.
We've started to add some money to that area,
particularly where earnings have held
up well on the cyclical side.
One example is the semiconductor space,
where demand for semiconductors is growing exponentially,
for example, through the growth in electric vehicles, which use
many, many more semiconductors.
So gradually, we're beginning to become
a little bit more cyclical and a little bit less defensive.
I think the combination of the correction in the market
post-COVID and the big recovery in earnings
since COVID means that the market is now
trading on very low valuations.
It's currently on just under 13 times this year's earnings,
which, if you look back historically,
is an attractive level.
If you can pair it with the US market as well,
you have to go back a long way before you
can see the European equity market trading so cheaply.
So yes, I think that investors ought
to be looking at European equities again.
The JP Morgan Growth and Income Trust
is ESG integrated, which means that we
consider ESG issues throughout the investment process.
When we're looking at a stock, for instance,
we're really thinking about incorporating
sustainable investing into just as we
do for any of the other metrics that we're looking at.
And so we think about both quantitative metrics as well as
fundamental metrics to look into what
are these issues that these companies are facing.
So an example of a quantitative metric
could be something as simple as the carbon intensity
of the business.
On the fundamental side, our research analysts
answer a 40 questionnaire and answer things
such as what are the processes in place
in terms of data security for a company,
and are those processes effective.
Or what is the credibility of the company
management in terms of reducing their carbon emissions?
So when we think about these questions,
it's not necessarily a simple yes or no, we
won't invest in them.
It really is just that starting point
in terms of how do we now engage with company
management in terms of turning this around
and really understanding these issues a lot more
and helping us understand the investment
case from then on forward.