JP Morgan European Investment Trust Income Shares (JETI) – income at a discount?

It is well worth income investors taking a look at JETI which reported final results yesterday (18.06.13) for the year to 31.03.13; the Trust returned 19.1% net of costs against a benchmark return of 16%. The Trust has recently changed its investment mandate to focus totally on European companies, whereas previously it had had some UK exposure in order to achieve the required yield.

Price (p) 101.75
Est. NAV ex inc (p) 110.0
Discount* 7.5%
Dividend (p) 4.25
Yield 4.2%
Est. net assets (£m) 70.1
Potential gearing +20%
Expanse ratio 1.12%
Est. spread 1.4

 *10.4% incl. undistributed income

The discount looks to have narrowed on this Trust but it still looks attractive verses equivalents investing in UK Stocks; for comparison, the average discount in the AIC UK Income & Growth sector at 31.05.13 was nil. Investors have been prepared to push many trusts to premia where they think a reasonable yield is sustainable.

There are a number of reasons why JETI may trade at a discount wider than similar trusts investing in the UK :

(a) European exposure

Obviously, Europe, for a while now, has not exactly been flavour of the month for investors, as dire economic news has continued to flow, so just having ‘Europe’ in the name may be a cause of some of the discount. But as the Trust itself points out, the underlying exposure of its investee companies (many of which are large multinationals) is probably not more than 50% European. (As an aside here, though, oddly, the Chairman of the Trust refers in his report to the exposure of the Europe Stoxx 600 being under 50% Europe, 35% Asia and 15% other developing, leaving virtually no sales to the US! Some mistake, I think.

Top Ten Holdings at 31.03.13 Weightings
Roche 3.8%
Novartis 3.8%
Total 2.6%
Siemens 2.2%
Allianz 1.9%
BNP Paribas 1.6%
Daimler 1.6%
ENI 1.4%
BBVA 1.3%
BASF 1.3%

Frustratingly, this only gives us a small amount of the total exposure, but it is probably enough to give us an indication.

Roche and Novartis, as large pharmaceutical companies, should not have too different an exposure to Glaxo and AstraZeneca in terms of end markets, the latter being two stalwart holdings of the UK Income and Growth sector. Similarly, the international oil companies Total and ENI are probably not that dissimilar (in broadbrush terms anyway) to Shell and BP.

Daimler is an interesting case, since it provides exposure to a car manufacturer, something that none of the UK invested Trusts can do.

Perhaps, there is a sub issue with concern re exposure to European Financials, but BNP and BBVA yield 3.4% and 5.7% respectively, compared to no dividend from Lloyds and RBS and a much lower yield from Barclays, for example. This gives income investors another exposure (to recovering banks) which they may not be able to get through UK trusts.

The point here is that JETI is not really that different in ultimate exposure to many of the Trusts in the UK Income & Growth Sector but it is at a bigger discount and offers exposure to some sectors which the UK cannot (at least directly).

(b) Currency exposure

Associated with European economic ills has been a fear of a break up of the Euro and consequent worries about taking a hit on the currency.

JETI’s Geographical Exposure at 31.05.13
France 16.3%
Germany 15.4%
Switzerland 12.9%
Sweden 11.4%
Italy 9.8%
Finland 7.6%
Spain 7.3%
Norway 6.5%
Netherlands 5.6%
Others 7.2%

With a proportion of the ultimate end markets being outside Europe (as above), the currency exposure may not be all that it seems in any case; but also 63% of the exposure here is either to countries outside the Euro (principally Switzerland, Sweden and Norway) or to countries whose currency might be expected to strengthen on the demise of the Euro (Germany, Finland and the Netherlands). This is assuming that France would not be part of a new ‘hard currency’ Europe, which it probably would be.

It is possible (and indeed probably now likely) that the Euro stays together, but it may still depreciate in value against Sterling and other currencies; but this is likely to be very positive for the equities of multinationals (and particularly for many German companies), as their foreign earnings increase in value.

(c) Capital structure

This trust is part of the JP Morgan European Growth Trust (there are two share classes, although they have underlying separate portfolios) and it is possible that investors fear some contagion between the two. But, this is not a split where the performance of one class may impact the other, so investors should be able to disregard this issue. The benefit of this structure is that it should reduce the running costs of the Trust. The current gearing is modest (stated at 2.6% at 31.05.13), although this has the potential to be increased to 20%.


Clearly there are risks in investing in this Trust compared to a UK Trust, but this may be more than compensated by the discount. The trust is relatively small, so liquidity is also an issue but, for the time being, the Board is continuing to buy back shares, which is both NAV enhancing and helps create liquidity.

JETI has been a holding in our advised Income Portfolio since the latter’s inception on 29.06.12.

This research has been produced by David Liddell, chief executive and major shareholder in IpsoFacto Limited which has approved this research. David may have equity holdings in any or all of the stocks listed.

The information contained in this research has been obtained from sources that IpsoFacto Limited believes to be reliable and accurate. However, it has not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.