How this ‘best ideas’ strategy has beaten the global index

While many global strategies have been struggling to gain an edge over the wider market due to the dominance of US technology companies, JPMorgan Global Growth & Income Ord (LSE:JGGI) has comfortably outpaced the global index over the past five years.

Our collectives editor Kyle Caldwell sits down with co-manager James Cook to find out the key performance drivers for the investment trust. Other topics include recent portfolio activity, UK company exposure, themes the portfolio is seeking to profit from, and why Cook is a “little cautious” on the outlook for global stock markets.

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Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me James Cook, co-fund manager of JPMorgan Global Growth & Income investment trust. James, thanks for your time today. 

James Cook, co-fund manager of JPMorgan Global Growth & Income: Thank you very much for having me. 

Kyle Caldwell: So, James, over the past five years the investment trust has outperformed the average global trust. You’ve also beaten your benchmark, which is the MSCI All Country World Index. So, what have been the key performance drivers over that five-year period? 

James Cook: It’s a good question. We’re quite glad to say there’s no individual theme. There’s no individual stock that has delivered this for us. It really comes back to the consistency and the quality of the alpha that we’re getting from many different sources. So, if you look at the past five years, we have delivered positive excess returns in over 70% of the sectors that we’ve invested in. We’ve delivered positive excess returns in all the regions that we’ve invested in, and hopefully that gives clients a feel for the consistency, the reliability of the alpha that we’ve generated.

Personally, I think that’s what separates us from some of the other strategies out there that may have delivered the magnitude of the alpha, but it’s really the quality of the alpha that we’ve delivered. So, as I say, it’s come from a broad number of stocks. If you take, for example, the past year, an area of real success for the strategy has been in the high-growth cohort. One of the things that we have done is we’ve been overweight to the semiconductor cycle. That’s played out really well for the strategy, and it has been the best-performing part of the market over the past year, or over 2023. So that was definitely a big positive.

But within media, we’ve also had some real success. So, focusing on the companies that have been successful at picking up on AI, your Microsofts, your Metas, your Nvidias of the world as well, but also avoiding the unprofitable growth parts of the market and investing in media stocks or e-commerce platforms that have improved their capital discipline, [that] has been a real area of success for us. 

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Kyle Caldwell: It’s a global approach and I noticed there’s very little exposure to the UK. Why is that? 

James Cook: When you think about the barrier to make this portfolio, the hurdle rate is incredibly high. We look at 2,500 companies worldwide, and it’s the top 50 ideas. To get above that hurdle rate is, first of all, incredibly difficult to do. We actually find some interesting opportunities in the United Kingdom. We have names such as Shell (LSE:SHEL), where we think the free cash flow yield of the company is incredibly attractive, a 15% free cash flow yield. And we’re seeing corporate governance improve, and hopefully we expect to see the valuation discount relative to its US peers begin to narrow. We also have names such as RELX (LSE:REL), a really good software company in our eyes. Their ability to monetise AI with later generations of the software, we think [is] going to be a new revenue growth driver for the company going forward.

Kyle Caldwell: You’ve explained that you set a very high bar for companies to win a place in the portfolio. How often do you make changes to the portfolio, and could you run through some of the most recent changes you’ve made? 

James Cook: Our turnover is around 70%, which may feel a little high for a fundamental long-only strategy, but the reality is about two-thirds of that is used on adding and trimming stocks, dependent on where the valuation of our companies currently lie. So, the real holding period for our names is around three, three and a half years, which is much more typical of a fundamental long-only strategy. That’s the first point I would make.

The second point, though, is to your question about what we have traded more recently. Over the past quarter, for example, we’ve kept the shape of the portfolio the same. We’re still exposed to the high-growth parts of the market, in particular the semiconductor cycle. We’re still overweight to the defensive part of the market. And our main underweight is to the low-growth cyclical part where we think earnings are currently well above normal levels. We think they are at risk of coming down. So, the first point is that we’re keeping the shape of the portfolio the same.

Within that though, as we’ve talked about, the performance has been really strong. So, we have tried to rebuild valuation back into the portfolio. Some of the stocks that we’ve had have outperformed quite significantly. So we’ve trimmed many of our winners and redeployed into some of the under-performers in the portfolio that we still have conviction in. For example, we’ve sold out of ConocoPhillips (NYSE:COP), a US energy stock, and redeployed that back into Exxon Mobil Corp (NYSE:XOM), where we saw 1.5% free cash flow yield pick up. It’s got £10 billion of net cash. It’s got cost-out reduction programmes. They’ve got a high grading of their energy base. So, we think the valuations there look attractive.

Also within the cyclical arena, we’ve trimmed our positions in Safran SA (EURONEXT:SAF), which is a French-listed aircraft engine manufacturer. The stock’s done pretty well over the last quarter, or even last year as well. So, we’ve trimmed part of that position and put it into another holding, Deere & Co (NYSE:DE), which is a US-listed tractor company. We see really attractive, long-term growth potential from Precision Agriculture. And also the stock has underperformed on the back of a pretty tough crop cycle. 

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Kyle Caldwell: In the previous video, you explained how you’ve got some exposure to the artificial intelligence (AI) theme. What other themes are you playing in the portfolio for the long term? 

James Cook: Good question. If you look at our top 10 holdings, we’ve got Mastercard Inc Class A (NYSE:MA). As you go from a cash society to a cashless society, we still think there’s decent runway for growth there, particularly within the emerging markets. But if you look at the US market, 30% of transactions in the US market are still done either via cash or cheques. I mean, as archaic as a cheque is, it’s still prevalent in the US, so we still see runway for growth there. Within cross-border activity, we still think that’s relatively low versus trend, so we still see a pick-up potential, which is quite meaningful for Mastercard. 

We’ve also got, as I discussed a minute ago, Deere, and the long-term opportunity for Deere is in Precision Agriculture. They have a leading franchise in spotting the difference between a weed and a crop with their technology. What that means going forward is that you need less pesticide to put on the fields for farmers, which is not only good as an environmental, social and governance (ESG) winner, but it also means cost-efficiency advantages for the underlying farmer. And we think that they will take market share with that newer product that’s going to come down the road. 

Finally, Chicago Mercantile Exchange. This is a US-listed exchange, which has plenty of products in derivatives, commodities and interest rates. We think that the macro volatility going forward will still be heightened. There’s still lots of hangovers from the Covid period. We think that volatility over 2024 will likely increase, which means more transaction volumes for CME Group Inc Class A (NASDAQ:CME), which for an asset-light business model is trading on attractive valuations.

Kyle Caldwell: How does the wider macroeconomic backdrop influence your investment decisions? For example, at the moment, a lot of commentators think the interest rate cycle has potentially peaked and we may see some interest rate cuts in the US and potentially here in the UK in 2024. So, if interest rates are cut, would that impact your investment decisions? Would you think about sectors or companies that might benefit more than others in that scenario? 

James Cook: Absolutely. If we knew that with certainty, we would probably lean into high growth a little bit more. But the reality is we don’t think we’re macro experts. We’re stock pickers at the end of the day, that’s our bread and butter. We’ve made substantial alpha by sticking to that, and that is what drives the portfolio going forward. So, from that perspective, we try to limit macro bets within the portfolio and really try and keep it to stock picking and just finding those best 50 ideas across that universe.

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Kyle Caldwell: Investment trusts have the ability to gear, or borrow to invest. At the moment, the investment trust that you manage doesn’t have any gearing at all. Is that typical, or does that show that you’re being more cautious than usual? 

James Cook: We have the ability to go from anywhere from 5% cash levels to 20% geared. At the moment, we are currently zero gearing. And, yes, we are a little cautious on the market. When we break the market down into its components, we think valuations are a little above historical averages, but nothing egregious by any metric. However, when we look at the earnings profile of the market, we think that the market has been over-earning post-Covid. So, if you look pre-Covid, margins of the global equity market ranged anywhere from 11%, up or down by 1% either side of that, from 2011 to 2019. Incredibly consistent margin profile.

Post-Covid, we obviously had this demand stimulus. We had supply constraints across the world, and any textbook macro expert will tell you your profit margins are going to skyrocket. And that is exactly what unfolded. Profit margins jumped to around 15%. Since then, supply has sorted itself out to some extent and profit margins have come down by over a per cent since then. Now, the market believes that we’re going to go back to record profit margins and, if anything, actually exceed them. We just think that’s unrealistic.

We think demand hasn’t normalised yet. When we see demand begin to normalise, we think more likely than not we’re going to get further margin pressure, and it’s more likely that we go to a pre-Covid level margin. I think there are elements that the market has improved at, particularly possibly with AI, but it’s more likely we go to pre-Covid level margins than we stay at elevated, or new, extremes. So from that perspective, we think earnings are at risk. In particular, it’s towards a low-growth cyclical part of the market, which is where our largest underweight is. So, think about your industrial cyclicals, your consumer cyclical stocks.

And then, finally, as I’m painting a bit of a negative picture at the moment, the reason why we’re not sitting in net cash is because we still think there is a significant amount of opportunity to find high-quality businesses that are underpriced. The ability for us to generate excess returns above the market is what keeps us towards a 0% gearing, or a 0% cash position. 

Kyle Caldwell: Finally, the question we ask all fund managers we interview, do you have skin in the game? 

James Cook: Absolutely. Part of the JPMorgan incentive package is 50% of that will be given to a fund manager, and it’s allocated by your manager to go into the strategies that you manage. So for me, that’s JPMorgan Global Growth & Income. And you get another 50%, which you get to select. Over the last two years, I have allocated that full 50% back into JGGI as well. So I’m 100% invested in the strategy.

Kyle Caldwell: That’s good to hear. James, thanks for your time today.

James Cook: Thank you very much. 

Kyle Caldwell: That’s it for our latest Insider Interview. I hope you’ve enjoyed it. Let us know what you think. You can comment, like and subscribe, and hopefully I’ll see you again next time.