JPMorgan American’s (JAM ) move to a higher conviction, but balanced investment approach four years ago continues to reap benefits with half-year results showing the £1.5bn closed-end fund beat its US benchmark by 4.3% in the first six months of the year.

Net asset value (NAV) including dividends rose 14.8% in sterling terms, outperforming the 10.5% total return of the S&P 500 index, although the investment trust’s shares lagged slightly, returning 12.1% as their gap, or discount, to NAV widened.  

Since the company appointed two growth and value-style fund managers to run its mostly large company portfolio in June 2019, JAM has delivered a total underlying investment return of 79.9% up to 30 June, ten percentage points ahead of the S&P’s 69.9%.

Tilt to growth

The large-cap portfolio that accounts for 90% of assets was tilted to growth during the first half with the allocation to value stocks cut from 51% to 44%. The separate small-cap portfolio accounting for the remaining 10% contributed a return of around 7% that underperformed in the half year.

Nevertheless, the latest data at yesterday’s close shows that JAM’s annualised 1.6% outperformance of the index has underpinned a five-year total shareholder return of 80.7%, again ahead of the benchmark’s 72.6% and a contrast to its previous index-hugging or trailing performance.

That makes it by far the best of the small band of North America trusts listed on the London Stock Exchange, which have returned 48.6% on average to shareholders over the same period.

Over three years, JAM’s success stands in sharp contrast to Baillie Gifford US Growth (USA ), whose annual results today confirmed a 12% underperformance of the US stock market since launch in March 2018.

Over three years, while USA’s high-conviction growth approach has come unstuck, producing NAV and share losses of 13.4% and 28.1% respectively, JAM has sailed through generating a 55.4% return on assets and 61.6% for shareholders, according to Numis Securities data.

Stock picks

The latest half-year period of performance was impressive because although the portfolio rode the AI and tech rally well with overweight positions in gaming graphics provider Nvidia, cybersecurity specialist Palo Alto and chip maker Advanced Micro Devices, its overall 25% exposure to IT at 30 June was 3.2% less than the index.

Communications services, a smaller sector for the fund at 7.4%, detracted as JAM’s 2% in broadband and cable provider Charter Communications failed to keep up with the market, although in March the managers Jonathan Simon, Timothy Parton and Felise Agranoff bought back into Meta to capture a rebound in the Facebook owner. The purchase was funded by the sale of video-conferencer Zoom, suffering a post-pandemic downturn in its consumer business and the competition in its business division from Microsoft Teams.

Stock selection in industrials also paid off with Quanta, a Texas-based engineering and construction company, benefiting from the US government’s huge investment in renewable energy, as did Hubbell, a grid components supplier boosted by the rapid adoption of electric cars requiring at-home charging.

Financials, the trust’s second biggest sector at 15.7%, a 3.3% overweight to the index, weighed on returns as holdings in Bank of America, M&T Bank and Loews, a conglomerate spanning insurance, energy and hotels, fell after the collapse of Silicon Valley Bank in March. The managers said they were ‘comfortable’ with the positions in the two banks ‘given their diversified loan books, attractive core deposit franchises, and superior credit quality’.

Another addition was SME accounting software provider Intuit whose growth was underestimated by the market with the shares trading at a 2018 valuation. It replaced industrial technology group Ingersoll Rand which the managers fear could struggle in a weaker economy.

‘Rolling recession’

While the US economy has performed better than expected, the managers were cautious on the outlook as the Federal Reserve’s interest rate hikes deliver what they called a ‘rolling recession’ similar to the late 1980s and early 1990s.

They were encouraged that much of the ‘speculative excess’ from an era of cheap money had been flushed out with unprofitable growth stocks, cryptocurrency, ‘Spacs’ and Cathie Wood’s ARK fund crashing to earth.

With the market back to climbing its ‘wall of worry’, the managers said the best approach was to take a long view, back high-quality companies but be mindful of valuations and only pay for ‘truly sustainable growth’.

Their analysis showed their large-cap stocks were expected to grow earnings by around 11% in the next year. That was in line with the market but came with a cheaper valuation, with the shares on average trading at a 20% discount to the S&P on a free cash flow measure.

‘While earnings may come under pressure over the next year, and may not deliver the forecast double-digit growth, it isJonathan Simon comforting to have the valuation cushion provided by our holdings, relative to the market,’ the fund managers said.