The fund managers of top-performing JPMorgan Global Growth and Income (JGGI ) have increased exposure to defensive companies as they believe a US recession is likely. 

JP Morgan’s James Cook and Citywire AA-rated Helge Skibeli and Tim Woodhouse pointed to rising unemployment, credit card and auto loan delinquencies, and weak demand from low-income households since mid-2023 as early indicators of a US downturn.

While these issues would challenge parts of the economy, businesses would not be equally affected with the portfolio managers most concerned about corporate profits in low-growth, cyclical sectors, such as US banks, where earnings have been above trend.

‘Elsewhere, industrial cyclicals are benefiting from re-shoring and government policies such as president Biden’s Inflation Reduction Act, which are attracting investment, but these favourable influences are likely to run out of steam at some point and corporate earnings are vulnerable accordingly,’ they said. 

The managers added that the US presidential election was another source of volatility, especially if the outcome increased geopolitical tensions.

They have turned to defensive companies, such as high-quality financials and payment companies, which are at least risk of near-term earnings declines. 

With their valuations at 15-year lows, the trio bought Swiss food and beverage company Nestlé and Dutch brewer Heineken, believing they should be resilient even if growth slows. 

However, this shift weighed on relative performance over the past year, as cyclical companies more dependent on the economy outperformed.

Annual results show the £2.7bn trust delivered a net asset value (NAV) total return of 28% in the year to the end of June, beating the MSCI All Country World index benchmark’s 20.1%. That was no mean feat given the narrowness of returns across the Magnificent Seven AI companies, but since then the fund has slipped behind. 

Morningstar data shows that since 1 July to date, the portfolio’s underlying returns have dropped 1.4% and the shares have tumbled 3.5% versus a 6.7% gain for the benchmark.

Beating the benchmark

High-growth AI companies, such as semiconductor companies Nvidia and TSMC, were the major contributors to performance over the financial year, soaring 190% and 70% respectively in sterling terms. 

‘The earnings growth of these companies has so far justified these strong share price gains and, with the adoption of AI still in its early stages, we see a long growth pathway ahead for these and several other portfolio holdings most exposed to the AI revolution,’ the managers said.

Other technology giants also contributed, including Meta, Amazon and Uber, which the managers highlighted for their capital discipline, strong competitive positions and cashflow levels.

Danish pharmaceutical company Novo Nordisk rallied on skyrocketing demand for its obesity drug Wegovy which may also help treat related diseases.

US-based insurer Progressive had benefited from high interest rates but was sold with Zurich Reinsurance after they became more expensive. 

Skibeli, Cook and Woodhouse added several beneficiaries from the rise of artficial intelligence and working from home. They bought companies providing memory capacity for computers and smartphones, including SK Hynix of South Korea and Samsung Electronics, which could make its products more popular with  AI-based tools.

For exposure to the transition to renewable energy and electric vehicles, the trio added to US utilities providers NextEra Energy and the Southern Company, both of which have benefited from supportive regulations.

They also remain positive on the outlook for suppliers of aircraft components given the aerospace industry is struggling to meet strong demand, with Airbus’ order book filled until 2030 and Boeing production falling below its historical peak after a series of fatal accident and equipment failures. They own US company Honeywell and French business Safran.

Returns

The strong performance for the financial year means a 23.6% increase in the dividend target in 2025 in line with the trust’s policy of paying out 4% of net assets. This means total dividends of 22.8p per share, up from 18.44p in 2023.  

The shares traded at a premium to NAV for the majority of the year, allowing the board a £34.5m placing and raising £342m through regular issuance, making it the largest issuer in the investment trust sector in the first half of 2024. 

Chair Tristan Hillgarth will step down from the board at the annual general meeting in November, to be succeeded by James MacPherson.

Over the past five years, the trust has delivered shareholder returns of 95%, well ahead of the MSCI ACWI index benchmark’s 67%. Its three-year returns are strong enough for it to win a place on the shortlist for Citywire’s 2024 Investment Trust Awards.