JPMorgan China suffers ‘disappointing’ year as growth stocks stall

JPMorgan China Growth & Income has extended its run of underperformance for another year, although September government stimulus measures delivered some reprieve.

The growth tilt favoured by JPMorgan China Growth & Income (JCGI ) has put a dampener on the value of its portfolio and shares in the past year, extending its run of underperformance.

The £188m portfolio failed to keep pace with its MSCI China index for yet another year, with a net asset value (NAV) total return of just 3.6% and shareholders up 2.3% in the 12 months to end of September, against the benchmark’s larger 12.7% rise, according to annual results.

This extended the poor run of luck for managers Rebecca Jiang and Li Tan, whose trust currently trades on a 13.4% share price discount, according to Deutsche Numis data.

Bringing the timeframe up to yesterday, JCGI shareholders are now down 17.9% over five years, including dividends re-invested, worse than than the 12.8% loss for the benchmark.

Chair Alexandra Mackesy said performance in the last year was ‘obviously disappointing’ but reiterated that the trust had preserved ‘its longer term track record of strong performance over 10 years’. 

Jiang and Tan said their portfolio continues to be undermined by a ‘style headwind’ as value stocks continued to outperform growth companies. The two best performing sectors over the 12-month period were financials and energy, which the portfolio is underweight given they are ‘characterised by limited growth prospects’.

The high growth area of healthcare was the largest negative contributor due to exposure contract development and manufacturing organisations (CDMO), discretionary healthcare services and public sector healthcare spending.

Wuxi Biologics and Asymchem, which provide services to pharmaceutical, biotech, and medical device companies, saw their shares tank after the US sought to pass the Biosecure Act that would prevent US federal-funded projects from employing Chinese CDMOs.

‘There are further market concerns that if the act is passed, it may also reduce the willingness of privately owned US pharmaceutical companies to use Chinese CDMOs, even if these commercial projects are not funded by the US government,’ said the managers.

‘As a result of these developments, we exited Asymchem and Wuxi Biologics following the year-end.’

Discretionary spending on healthcare also took a turn for the worse as ‘contrary to our expectations, the post-pandemic recovery in discretionary and out-of-pocket healthcare services proved to be short-lived’.

‘To rectify this misjudgment, we exited Imeik Technology, a cosmetic dermo filler maker, and Aier Eye Hospital, a private eye hospital,’ said Jiang and Tan.

Healthcare stocks also had to contend with an anti-corruption campaign and post-Covid local government austerity, forcing the fund to exit lab operator Guangzhou Kingmed Diagnostics due to its reliance on local authorities.

Healthcare remains one of the top three overweight sectors in the fund alongside IT and industrials.

In tech, Jiang and Tan ‘existed a few relatively expensive software stocks’ including Beijing Kingsoft Office, software provider to the finance industry Hundsun Technology, and Shanghai Beosight Software, which operates within the steel industry.

Jiang and Tan said ‘valuations matter’ to them and before the latest round of stimulus announced by Beijing at the end of September, the market was ‘discounting very pessimistic assumptions’ that set the stage for a ‘very sharp rebound’.

‘Any further improvement in China’s economic outlook is likely to spark further interest from international investors,’ said the managers.

However, the duo are acutely away of the ‘negative narratives’ around China and the attacking stance president-elect Donald Trump has taken that ‘may cap the asset class’s valuations in the near term’.

While Jiang and Tan continue to find opportunities, accessing debt to gear the fund has been one problem. 

The average gearing level during the year was 6.7% but the managers said the ability to gear up was ‘constrained by the high cost of bank loans’.

‘To solve this problem, JPMorgan has completed a project to make contracts for difference (CFDs) available to the company,’ they said. ‘This provides an alternative way of increasing leverage when we need it.’