jp morgan fleming trust's leverage caused underperformance but is now aiding returns
JP Morgan Fleming's £235m Claverhouse investment trust has begun to reap the benefits of gearing, with NAV growing ahead of its benchmark FTSE All-Share index over the past six months.
After gearing of up to 25% weighed on performance during the bear market, the trust has now outperformed its benchmark over one, three and six months to 18 June.
The trust's net asset value has grown by 12% over the six months to 18 June, ahead of the UK General sector weighted average of 11% and the 9% growth posted by the FTSE All-Share. At the peak of the market in early 2000, gearing was down around 10%-12% but rose to 25% as the value of the portfolio fell during the equity downturn. Gearing in the trust was 21% of NAV as at 18 June.
Portfolio manager James Illsley said it was this relatively high gearing which contributed to underperformance over one and three years, when NAV fell by 17% and 39% respectively, against benchmark contractions of 12% and 34%.
'The underlying stock selection has been good, so the portfolio has outperformed, but those returns have been quashed by the gearing effect in the bear market.'
At the peak of the market in early 2000, gearing was down around 10%-12%, but rose to a peak of 25% as the value of the portfolio was diminished during the equity downturn.
Illsley said gearing would be maintained in a 20%-25% band going forward.
The trust's largest weighting is in financials, at 30% of the portfolio, with Illsley finding good value plays.
'We are finding attractive opportunities there, particularly in the banking sector over the past six months and the life insurance sector, given how far share prices had fallen,' he said.
Non-cyclical consumer goods, the second largest sector at 16.4% of the portfolio, is underweight relative to the benchmark as Illsley has taken a negative stance on beverage and food stocks, where he believes valuations have become quite stretched. Other non-cyclical areas such as health and utilities are also underweight, as is real estate.
The trust is overweight more cyclical sectors such as construction, particularly housebuilding as anticipation of corporate activity is stimulating investor interest. Engineering stocks are also overweight as firms in the sector are good value and benefiting from a focus on cashflow, he noted.
The portfolio is currently positioned with around 90 stocks, down from more than 100 in 2001, as lower market volatility has slightly reduced the need for diversification.
'You didn't need to have such big bets two years ago given the extreme stretch in valuations between cheap and expensive stocks ' you could have a small position and make a significant amount of relative performance,' Illsley said.
The trust was trading on a discount to NAV of 3.6% on 18 June, against a UK General sector weighted average of 8.8%. As JPMF's flagship retail investment trust, with around 85% retail ownership, Illsley said discounts are usually maintained within 3%-4% of par.
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