Expecting handsome long-term returns: JPMorgan China Growth & Income

JPMorgan China Growth & Income (JCGI) asks the managers to focus on the growth part of the equation. They are asked simply to find the best growth prospects in the vast Chinese equity market, while the board pays a Dividend out of capital worth 4% of the previous financial year’s ending NAV.

JPMorgan (JPM) has resources that are second to none in China, with a team of 24 investment professionals specialising in China within their Emerging Markets and Asia Pacific (EMAP) team as well as a team of 20 analysts from CIFM. This is a Shanghai-based fund manager previously run as a joint venture which JPM has now taken full ownership of, deepening its resources and access to the onshore Chinese market.

The EMAP team focus on finding high-quality growth companies, i.e. those that can generate above-market earnings growth sustainably year on year. They aim to look out further than the market to help them add alpha rather than getting caught up in short-term noise.

China has certainly been ‘noisy’ in recent years, with international and domestic issues leading to volatile markets. The overall effect has been for the market to take a serious knock over the past two years (see Performance). Managers Rebecca Jiang and Li Tan argue that this has contributed to the emergence of some excellent long-term opportunities amongst companies which have good long-term prospects and are at undemanding valuations compared to history.

With Chinese equities falling out of favour, JCGI’s shares now trade at an 11.3% discount to NAV, having traded on a premium when sentiment toward China was more optimistic.

We think JCGI is an attractive way to invest in China for those who want to maximise their chances of gaining long-term growth. The focus on long-term earnings growth when it comes to company selection is a key reason, and another is the team’s use of gearing when they see a valuation opportunity. When we spoke to the team they expressed their optimism about the long-term prospects for their portfolio after a significant sell-off.

We think investors in China need to be prepared to stomach volatility. The market has a track record of displaying volatility, and in the near term, there are a number of risk factors. Domestically the most important is the outlook for the Chinese economy, which is struggling in the aftermath of ditching zero-COVID. While this may not be a key factor for corporate earnings in the long run, it seems likely to drive investor sentiment in the short term. However, JCGI’s shares are available at a significant Discount to NAV, so offer some compensation for those risks and the potential for higher returns when sentiment towards China improves.