The other day I saw that Neil Nuttall is to leave JP Morgan. Since 2010 Nuttall was co-manager (with Sarah Emly and John Baker) of JP Morgan Income & Growth (JPMIG), and during his tenure the fund has generated reasonable performance.
The news spurred me to look at JPMIG, which is one of a dwindling number of split capital investment trusts.
JPMIG, which was launched in December 2006, had a difficult start. The market had a good run for the next few months but after a wobble in summer 2007, hit a peak in October then fell sharply as the credit crunch took hold. It was 2013 before the market regained December 2006 levels.
JPMIG has two classes of shares, income and capital. Its gearing is provided by bank debt (rather than zero dividend preference shares, a typical component of other split capital investment trusts).
The company has a fixed life and will be wound up on 30 November 2016, when the income shares get 103.4 pence per share plus any undistributed income. The capital shares get whatever is left over.
Because of the sharp fall in markets, the capital share net asset value (NAV) was underwater between 2008 and late 2013. The price of the capital shares fell from 50p to less than 5p during the crisis.
Over the past year however, as the asset value of the trust has recovered, the capital share price has doubled. The capital shares trade on a substantial premium to their asset value however as investors gamble that markets will continue to rise between now and November 2016. Essentially, the capital shares are priced like warrants.
Now the capital entitlement is fully covered, all future return from the income shares will come from dividends. Investors must remember, though there is a risk if markets fall between now and the end of the fund’s life, their final payment could fall short of the 103.4 pence target.
The yield on the income shares is 4.6% today. The dividend had to be cut during the crisis, falling from 6.2p in the year ended 31 January 2009 to 4p the following year. In spring 2012 the board felt able to start increasing the dividend again and it is currently running at an annualised rate of 4.4p (the dividends are paid quarterly).
Still building reserves
In the year to end January 2013, the dividend was fully covered by earnings and the company is slowly building its revenue reserve (today there is 1.46p of income accrued in the income share NAV)
The fund is just over 30% geared with a mixture of fixed and floating rate debt. JPMIG has a £20 million facility with National Australia Bank, which expires in December 2014. It has drawn down the whole amount of the loan and fixed the interest rate on half of it at 2.83% for the duration of the facility.
JPMIG’s benchmark is the FTSE 350 Index. The portfolio differs quite a bit from this, however. Although it is primarily invested in UK equities JPMIG has just over 28% of its portfolio invested in other funds managed by JP Morgan – JPM Multi-Asset Income, JPM European Strategic Dividend and JPM Global High Yield Bond fund.
JPMIG also has a handful of investments in convertible bonds. The multi-asset fund, about 17% of JPMIG’s portfolio, is managed by Talib Sheikh and Michael Schoenhaut and invests around the globe in a mixture of equities and bonds (around 40:60).
The UK equity portion of the portfolio, which is managed by Emly and Baker, is biased to large cap stocks with about 60 holdings, and 45% invested in the 10 largest equity positions at the end of December 2013.
Nuttall’s job, within the JPM team looking after JPMIG, was to manage the element of the fund invested outside the UK equity portfolio.
The new managers of this part of the fund will be James Elliot and Katy Thorneycroft. They have a wealth of experience in managing multi-asset funds of funds so I do not think investors should be too worried about performance following Nuttall’s departure.
Ongoing charges for the year to the end of January 2013 were 1.32%, barely changed on the previous year. The management fee is 0.8% on the first £65 million of assets and 0.7% on the rest; they leave the investments in other JP Morgan funds out of the calculation to avoid double charging.
At first glance, JPMIG is quite a complex fund with a lot of moving parts but, if you think about it from the point of view of an investor in the units, it is actually a well diversified multi-asset fund, generating a decent yield. I imagine, though, that the level of gearing may not be to everyone’s taste.
James Carthew is a director at Marten & Company