Rigour and research boost results

JPMorgan Overseas has outpaced the benchmark since 2008, and despite a dip in performance, the outlook is positive as the manager employs a strategy that aims to deliver in the long run.

Jeroen Huysinga took on the JPMorgan (JPM) Overseas trust in the midst of the credit crunch back in 2008, and has doubled benchmark performance via his stockpicking. He overhauled the global equity portfolio in his early weeks, turning over more than half the holdings and shifting to a less benchmark-constrained approach.

Since October 2008, the trust has produced net asset value (NAV) returns of about 30% against 15% from the MSCI AC World index, re-rating to trade at about asset value or a slight premium.

More recently however, it has struggled in the flight to safety environment, losing money and lagging its benchmark over the third quarter. Husyinga says his focus on firms with cyclical earnings recovery and mid-cap bias has hurt performance.

Huysinga notes parallels between recent months and periods of similar stress in 1998, 2002-03 and 2008. “On each occasion, the valuation gap between companies that were large, solid and well capitalised and those more economically sensitive and prone to volatility rose to excessive levels,” he says. (Investment trusts continues below)

With economically sensitive companies hit the hardest in recent months, Huysinga says this has resulted in some attractive opportunities.

While not changing the portfolio’s overall stock-specific risk profile, he has switched between companies in response to price moves as well as cutting all gearing in July.

Geographically, the focus on stocks that are cheap relative to global peers has led to a skew away from America and towards Europe and Britain. Although not successful in the short term, he says the valuation disparity between these two markets has become overwhelming.

Elsewhere, his valuation discipline is also preventing aggressive positions directly in emerging markets, investing via western names such as Ericsson, Kuehne & Nagel and ABB instead.

Before the recent bout of volatility, the trust had a solid 12 months to the end of June, driven by stock selection in sectors such as basic materials, where holdings Rhodia, a French speciality chemicals company, and First Quantum Minerals, both rose more than 100%. In April, Rhodia agreed to be acquired by Solvay at a 50% premium.

Looking forward, Huysinga says that in contrast to 2008, corporate earnings results have been strong despite modest economic growth in developed markets.

“Although we are mindful of how upbeat companies were shortly before the Lehman crisis, it is important to focus on the differences as they relate to corporate health, inventory ratios, banks’ willingness to lend and the level of activity in such areas as US housing and automotive sales,” he adds.

”Out-performance following falls in 2008 is a good example of how the strategy is suited to rising markets”

“We fully expect the economic recovery to be slow and drawn out in many developed markets, as is frequently the case in the aftermath of a financial crisis. The Federal Reserve policy is accommodative and will not be tightened soon, and additional measures will be used as necessary to support the economy.”

Simon Elliot, the head of research at Winterflood Securities, says the trust’s turnaround in performance under Huysinga has been impressive and the approach benefits from JPM’s research.

“Outperformance has moderated from the levels seen in 2009, as expected by the manager, but we believe the rigorous approach, combined with well-defined risk controls, means the trust remains well placed to outperform over the market cycle,” he says.

“We would expect the fund to underperform in falling markets where correlations between individual stocks increase – so if the downturn continues, it is likely to struggle against its benchmark.

“However, it is well placed for a recovery; outperformance following falls in 2008 is a good example of how the strategy is suited to rising markets.”