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JP Morgan Claverhouse: cheap, but not good value
With a discount of around 9% the JP Morgan Claverhouse investment trust might look like a bargain, but performance has been lacklustre, says James Carthew.
James Carthew, a director of Sapient Research, gives his view on the JP Morgan Claverhouse investment trust
JP Morgan Claverhouse opted to be designated as part of the 'UK Growth and Income sector', as defined by the AIC trade association, in May this year.
The shift from the UK Growth sector made sense as Claverhouse had, for some time, paid a much higher yield than most of its competitors, and I think the board believed if it was recognised as an income fund the rating might improve. Right now though, the discount is still one of the widest in its sector.
Claverhouse is a £222 million market cap fund, a lot smaller than it was a decade ago thanks to buy-backs, but still a reasonable size. Like most of the group it uses the FTSE All-Share Index as its benchmark. The fund has a slight bias to small and medium-sized companies relative to this index (with small-cap exposure provided through investments in JP Morgan small cap funds) but the portfolio will always be dominated by large companies.
Fees are reasonable at 0.55% of market cap. There is a performance fee of 15% of returns generated over 0.5% above the benchmark and this is capped at 0.4% of net assets and paid over three years. The objective is to deliver returns of 2% per annum above the benchmark over rolling three-year periods, so the board has designed the performance fee to be a ‘normal’ part of JP Morgan’s remuneration.
The yield is 4.4%, which is towards the top quartile of growth and income funds; dividends are paid quarterly. The dividend has not been covered by earnings for the past couple of years, however. There are revenue reserves (and they could now opt to distribute capital) but the aim is to fully cover the dividend. This may restrict dividend growth for a while.
There is some long-term debt in the form of a £30 million 7% debenture that matures in 2020. Repaying the debenture early would be expensive. The board has decided that this money should normally be fully invested – ie, there would always be a modest level of gearing. For the moment, much of the debt is offset by cash deposits – while this situation persists there will be a modest drag on capital performance and income.
Claverhouse’s performance relative to its benchmark does not look all that marvellous and has not done so for some time. The fund was managed with the same investment process that drives stock selection on most of JP Morgan’s funds.
This has struggled to generate outperformance in some markets in recent years: stablemate JP Morgan Mid Cap has also disappointed, for example. After Claverhouse underperformed its benchmark in four out of five years, the board decided action was needed. In March this year, after working with an independent consultant, JP Morgan proposed adopting a more concentrated portfolio.
Previously the fund had more than 100 holdings, the idea was that this would be reduced to between 60 and 80 – not particularly focused by the standards of some funds, but the board hoped JP Morgan’s stock selection decisions would have a greater impact and they would be more overweight the companies where they had the greatest conviction.
James Illsley, manager of the fund since 2002, was replaced by William Meadon. Sarah Emly stayed on as co-manager. The notice period was reduced to three months (in the event that underperformance continues, one year otherwise).
By the end of June they had reduced the number of holdings to 64, which is a step in the right direction. They have underperformed the benchmark in the few months since they changed the investment approach, but I think not enough time has elapsed for that to be any indication of things to come.
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- JPMorgan Claverhouse (Ordinary Share)
- JPMorgan Smaller Companies (Ordinary Share)
- JPMorgan Mid Cap (Ordinary Share)
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