- Trust marginally underperformed S&P 500 in 2022
- Market falls have created a ‘great opportunity’ for active managers
- Fund has outperformed benchmark since summer of 2019
Investment trust JPMorgan American (JAM) reported an 8.7% decline in net asset value (NAV) on a total return basis for the year to December 2022, marginally underperforming the S&P 500 benchmark which fell by 8% in sterling terms.
However, the shares edged 0.3% higher to 702p as the managers insisted the recent market pullback across the pond has created ‘a great opportunity for active managers to take advantage of the lower prices of high quality companies’.
Chairman Kevin Carter added that current market pricing is ‘more attractive than it has been for some time’, and also reminded investors that since a change in investment approach in June 2019 JPMorgan American has outperformed the benchmark by 6.9% in the subsequent 45 months through the end of February 2023.
Over that time it has produced an NAV total return of 65.3% versus the 58.4% returned by the S&P 500.
LARGE CAP PORTFOLIO OUTPERFORMS
The second largest trust by assets in the Association of Investment Companies’ (AIC) North America sector behind Bill Ackman’s Pershing Square Holdings (PSH), JPMorgan American strikes a balance between value and growth through a high-conviction portfolio biased towards US large-caps.
While the large-cap portion of the portfolio posted a negative return in 2022, it outperformed the benchmark thanks to strong contributions from the likes of oil and gas goliath Conocophillips (COP:NYSE), auto parts retailer Autozone (AZO:NYSE) and pharmaceutical company Abbvie (ABBV:NYSE).
The trust’s small-cap allocation detracted from relative returns and this, combined with the use of leverage, was the reason for the portfolio’s underperformance.
Managers Timothy Parton, Jonathan Simon and Felise Agranoff are being very selective, only adding names with differentiated and compelling fundamentals.
During 2022, just nine new names were purchased - one company passing muster was Solaredge Technologies (SEDG:NASDAQ), which provides solar power equipment to residential and commercial customers - and exited the same number, substantially fewer than in 2021.
In terms of the outlook, the managers noted that the forward price-to-earnings (PE) ratio on the S&P 500 is now at 17 times, ‘well below the 21 times level at which it started the year’.
And while they believe the weakening economic backdrop will result in a ‘modest’ contraction in earnings, after last year’s market decline, ‘US equities are already discounting weaker growth and a significant amount of future damage to cash flows and corporate earnings’.
The managers insisted that the past year’s market fall and any further drawdown ‘should set investors up for better returns in the long run, particularly if the current uncertain climate is eventually replaced by one reminiscent of the last decade, which was characterised by slow growth, low inflation, low interest rates and high profitability.
‘This is the case because current low valuations represent a great opportunity for active managers to take advantage of the lower prices of high-quality companies to position portfolios for the subsequent stock market recovery, as we have already been doing over recent months.’
