JPMorgan Asia Growth & Income (JAGI) has published its annual results for the year ended 30 September 2024, during which it provided an NAV total return of 14.8% and a share price total return of 12.7%, both underperforming its MSCI AC Asia ex Japan Index Benchmark, which returned 17.3%. The bulk of the underperformance was due to stock selection, which detracted 2.2% and gearing detracted 0.3%. JAGI’s board is recommending an increase in its enhanced dividend from 1.0% to 1.5% per quarter – effectively a yield of 6% per annum – in order to differentiate JAGI further from its peers and to stimulate additional demand for its shares.

Enhanced dividend policy changes

Since 2016, JAGI’s dividend policy has been to pay a regular, quarterly ‘enhanced dividend’, that is one funded from a combination of revenue and capital reserves. Historically, this has been equivalent to 1% of the company’s NAV, based on the NAV on the last business day of each financial quarter, being the end of December, March, June and September. This policy was designed to increase the appeal of the company to investors who have an income requirement, while avoiding placing any constraints on the managers in managing the portfolio. For the year ended 30th September 2024, dividends paid totalled 16.0 pence (2023: 15.7 pence).

JAGI’s board says it is conscious that this policy was established at a time when interest rates were low and that a notional dividend yield of 4% per annum is not necessarily as attractive today as it was eight years ago. Following a review with its advisers, the board is recommending an increase in the enhanced dividend to 1.5% per quarter, i.e. a notional yield of 6%. The view is that this will further differentiate the company from its peers and lead to additional demand for its shares. Over time, this should lead to a narrower discount and therefore reduce the number of shares that are bought back in order to meet the discount target.

The company’s shareholders will be able to vote on the level of the dividend at the Annual General Meeting on Wednesday, 19th February 2025. Assuming that support is forthcoming and the new level of dividend is approved, it will be effective from 31st March 2025 and the dividend will be set at 1.5% of the company’s NAV for subsequent quarters, in the absence of unforeseen developments. In the board’s view, calculating the dividend quantum each quarter is a prudent way of delivering an income which tracks performance and does not put the company under strain.

Discount management

JAGI’s discount widened during the year to 11.2% at 30th September 2024, from 9.2% at the end of the previous financial year, which is broadly in line with the discounts of its immediate peers. JAGI repurchased a total of 12,156,156 shares (representing 13.4% of share capital at the start of the year) and holds them in treasury. Since the end of the financial year, it has repurchased a further 3,596,249 shares. These share buybacks are accretive to the NAV per share for remaining shareholders and added 5.1p per share to the NAV in the last financial year.

Gearing

JAGI currently has no loan facility in place as its multi-currency loan facility with ScotiaBank was retired in December 2023. Its board says that, considering the high levels of market volatility, especially over recent months, the decision to avoid gearing the portfolio has been appropriate. However, the board continues to review actively the company’s debt arrangements which includes the potential use of contracts for difference (CFDs) for gearing. The board regularly discusses gearing with the portfolio managers, as it has the potential to enhance performance.

Investment manager’s comments on attribution

“The largest detractor to the fund’s performance over the fiscal year was Meituan, China’s leading food delivery platform. Increased scrutiny and regulatory actions from the Chinese authorities impacted the company’s operations and investor confidence. This included tighter regulations on data privacy, antitrust measures, and labour practices affecting gig economy workers. Additionally, the broader economic slowdown in China affected consumer spending and overall market sentiment. This had a direct impact on Meituan’s core businesses, such as food delivery and travel services. Other detractors included HDFC Bank, India’s largest private bank. The company’s post-merger operations have suffered slow deposit growth and tight system liquidity, resulting in very little earnings growth during the year.

“Positive contributors included overweights in the technology sector such as SK Hynix, a Korean semiconductor manufacturer, which outperformed on the back of their leadership in high bandwidth memory chips used in AI servers. Sales of these chips accounted for roughly 15% of total dynamic random-access memory (DRAM) chip sales in the first half of the calendar year. Demand for AI-powered processes also supported Foxconn Industrial, a Chinese company that benefitted from rising orders for data centre assembly.”

Investment manager’s comments on portfolio activity

“Significant transactions for the Company over the fiscal year included the purchase and overweighting of Alibaba from a zero weight. Alibaba is a leading Chinese multinational conglomerate specialising in e-commerce, retail, internet, and technology. It operates various platforms, including Taobao and Tmall, which connect consumers and businesses for online shopping. Additionally, Alibaba provides cloud computing services, digital media, and entertainment, expanding its influence across multiple sectors globally. The fund also purchased an off benchmark position in Telstra, Australia’s largest telecommunications company, providing a wide range of services including mobile, internet, and pay television. It also offers network services and solutions for businesses, leveraging its extensive infrastructure and technology expertise.

“Outright sales included two names in China. Firstly, Baidu, which is a leading Chinese technology company specialising in internet-related services and products, including its popular search engine, artificial intelligence, and cloud computing. The outlook for the company to monetise its internal large language model (LLM) model, which is called ErnieBot, deteriorated as competition led management to reduce pricing. Despite having excess cash on the balance sheet, management have not outlined plans to pay this out to minority shareholders. Secondly, was the sale of Foxconn International, which specialises in designing, developing, and assembling a wide range of electronic products, including smartphones and other consumer electronics for major global brands. Foxconn is a subsidiary of Hon Hai Precision Industry Co. Ltd., a leading electronics manufacturing services provider. The shares performed well during the fiscal period, primarily due to increased orders for AI server assembly.”