Interactive Investor

The four stocks we are backing from the ‘Magnificent Seven’

JPMorgan Global Growth & Income co-manager James Cook explains how the trust finds its best 50 stock ideas, the investment cases for four of the ‘Magnificent Seven’ US technology stocks, and more.

20th March 2024 08:56

by Kyle Caldwell from interactive investor

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JPMorgan Global Growth & Income, an investment trust, seeks to find the best companies across the globe to deliver both capital growth and income. Our collectives editor Kyle Caldwell asks co-manager James Cook how the trust finds its best 50 stock ideas, how a quarterly dividend is achieved, and why the portfolio avoids being wedded to a particular investment style.

Artificial intelligence (AI) is one of the themes the portfolio is seeking to profit from. Kyle asks James to run through the investment cases for four of the Magnificent Seven US technology stocks that the trust is backing.

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 Ord (LSE:JGGI) 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, let's start off with the investment process. The investment trust is aiming to deliver both capital growth and also pay an income. Can you talk us through how you blend the two? 

James Cook: When it comes to our stock selection process we're much more focused [on] the stocks with the highest total expected returns. So, from that angle, we are agnostic as to whether its coming from growth or from dividends. That said, what we do want to give investors is a balance. We want our stocks to work throughout, whether its a growth period or a value period. And what weve seen over the last five years is thats exactly what weve delivered.

Weve gone through three different style regimes from 2019 to the end of 2021. We went through a growth period where the growth stocks outperformed value. Over this period, we delivered over 8% excess returns over and beyond the market. Thats a meaningful step up. In 2022, we saw the signs of the overheating, we saw interest rates picking up, inflation picking up, and the value stocks began to work. And over that time period, we managed to deliver nearly another 8% excess returns above the market.

Finally, since the start of 2023, weve had another artificial intelligence (AI)-led growth regime, where again, weve delivered nearly another 8% excess returns above the market. But I think thats whats making us really attractive to shareholders, is this performance or our stock picking, which is agnostic to styles but delivering in both types of environment.

Kyle Caldwell: Some of the income you return to shareholders can be from capital. Arguably, this gives you greater flexibility. You dont have to, for instance, reach for yield. However, is it a potential drawback, if its a difficult year and theres less capital growth coming in, if that dividend is going to be more volatile?

James Cook: I think to a certain extent thats a fair assessment. Obviously our payout policy is to give out 4% of the net asset value (NAV) of the trust each year in four equal quarterly instalments. So, call that 1% of the trust value each year. Now that policy is set by the board, its not set by the fund managers. But youre right in the sense that if equity markets were to fall, then our net asset value would fall and there would be a risk that potentially the dividends would come down with that.

Obviously thats a decision set by the board rather than ourselves. But Id also say its not really that unique to JGGI to the same extent. If you think about where a lot of those dividends come from, theyre typically from the finance part of the market. When we see equity markets falling, recession risks picking up, we have seen through history that those parts of the market also find it harder to pay out dividends in that environment. I dont think its going to be particularly unique to JGGI, but your assessment is fair. 

Kyle Caldwell: So, the entire focus is to find the best companies across the globe. How do you achieve that? I understand that you have a number of analysts that cover a certain amount of companies. How many do they cover and what needs to happen for a company to win a spot in the portfolio? 

James Cook: A huge advantage of JPMorgan Asset Management is the research team. We have over 80 analysts worldwide. We have them in the US, Europe, Japan and the emerging markets, and each analyst will cover a sector within a region. So, we have a European banks analyst, a Japanese banks analyst and so on. Each analyst will cover roughly 30 stocks, and that gives us aggregate coverage of around 2,500 companies. So, that breadth of coverage is unrivalled.

How we then go from those 2,500 companies down to the best 50 or so ideas, theres three simple criteria for JPMorgan Global Growth & Income. First, were looking for significant valuation upside in these stocks. So, at the heart of our philosophy, we believe that the value of a company is driven by its long-term earnings power and the quality of its cash flows. Once our analysts forecast the long-term earnings power, once they value the quality of those cash flows, we get an expected return. Well then rank those expected returns from the most attractive down to the least, and we are naturally going to look to buy the companies with the highest expected returns.

However, were aware that undervalued businesses can remain so for prolonged periods. So, the second part is that we want to have clear insight into what makes the stock perform. Wheres our edge? Where do we differ from the market?

And insights, incredibly important, to us in understanding those business models, because at any point in time, some of these companies are going to go through a wobble and even the highest-quality companies go through their wobbles. And if we can understand that, we can understand whether its a short-term risk, where theres something of a valuation opportunity for us to add, or whether theres a long-term risk in the investment thesis that arguably we need to be exiting early. So thats the second component.

Finally, the third one is you can have all the insight into these businesses, you can have all the valuation upside, but if the company doesnt control its destiny, it can be all for nothing. So, what we want to have is what we call high-conviction stocks or quality businesses, so that theyre not at the mercy of their competition. We want them to have strong balance sheets, resilient earnings so that theyre not at the mercy of the economic cycle. And we want them to have a management team thats incentivised to deliver on behalf of shareholders. And thats what really takes us down from the 2,500 stocks all the way down to those best 50 or so ideas.

Just to give you a bit of flavour, that means that less than 3% of the stocks that we look at make the final portfolio. So, from our perspective, I think this makes it one of the highest-conviction strategies in the market today. And people always ask, well, you know, theres more concentrated strategies out there, which is technically true. Theres the 20-stock portfolios, but I dont think they look at the breadth of ideas that we have at JPMorgan. So, from that perspective, in terms of conviction, I think JGGI is one of the highest-conviction strategies. 

Kyle Caldwell: And in terms of investment style, such as growth, momentum, value, theres not one that you particularly favour over another? 

James Cook: No, absolutely. Youre right, we are style agnostic. We can go anywhere in the world to find the best ideas, whether thats in the high-growth cohort of the market. You know, your tech titans, your semiconductor cycle, whether thats in the cyclical arena or the value arena, we can go anywhere in the world, to get the best companies.

Kyle Caldwell: Of the so-called Magnificent Seven technology companies, you own four of them. Could you explain the investment case for each, and is part of the reason why you now own them due to the future potential of artificial intelligence?

James Cook: Its a great question. Its really still early innings. That said, I think theres a lot of similarities with other themes that weve seen play out over the years. I think youre going to have those companies that can successfully monetise AI and those companies that will need to adopt AI just to remain competitive and to remain relevant. So, what we were trying to do is to find those companies that we believe can monetise AI, that will have stronger barriers to entry on the back of it.

And so youre right, we have four of the Magnificent Seven. Were proud to say weve successfully picked the better-performing four of the seven. So, we have Microsoft Corp (NASDAQ:MSFT) which is gaining significant market share in cloud computing and we think thats down to the combination of, first, they have one of the best offerings in terms of cloud with their operating system, with Microsoft 365, with their security network. AI, arguably, it changes the playing field because, from our perspective, if you want to deliver AI, you need to have all your data on one platform, which means its going to have to be on the cloud. Because of that, we think it means that cloud computing has a longer runway for growth, which will benefit Microsoft. But on top of that, Microsoft has arguably one of the best large language models in the world with ChatGPT. What that means is really twofold. One, it should improve their cloud offering, which we think helps them further gain market share, but also theyve successfully been able to monetise AI, which at this early stage in delivering it, is an incredibly impressive feature.

Outside Microsoft, we hold NVIDIA Corp (NASDAQ:NVDA), which, as many of you will be aware, is the worlds number one manufacturer of graphic processors, or what well call GPUs. They have a 90% market share. And we just see demand for those GPUs outstripping supply for the foreseeable future. Thats what [the company] came out and told us a couple of weeks ago, the stock had done very well on the back of that guidance.

Third, we have Amazon.com Inc (NASDAQ:AMZN), and this is actually less to do with AI. We think with Amazon, they have a much better potential to improve the margin of their e-commerce platform. And so far weve done pretty well with that thesis. We think they can not only reduce the costs to ship, which theyve done very well at, but we also think they can get better pricing. So, with all the CapEx they spent over the last three, four years since Covid, we think their ability to serve next day delivery has improved substantially. And from the past, what weve seen is that next day delivery typically comes with much better pricing power. So, that combination of better pricing power with better cost control combined, we think the market is under-appreciating the margin potential there.

Finally, with Meta Platforms Inc Class A (NASDAQ:META), from our perspective, this is a company that has really utilised AI incredibly quickly and productively. Since Covid, their user engagement on Facebook, and on Instagram, is up. Thats an incredibly impressive feature as most social media platform engagement is down, obviously, since during Covid we were all engaging more on our phones. We had more time at home, and so that sort of user engagement lifted, but Meta has successfully managed to keep that user engagement high. How theyve done that is basically using AI algorithms to put the right content in front of users. On top of that, we were also seeing monetisation of the platform improve because theyre putting the right adverts in front of the right users. Which means that were clicking on more of the right adverts and were monetising it better. So, as I said at the start, were trying to find those companies [that] can utilise AI, improve their barriers to entry, and monetise it.  

Kyle Caldwell: In terms of country weightings, the US accounts for around two-thirds of the portfolio, and then in second place, its Europe. Why is it that you tend to mainly stick to developed markets? 

James Cook: Theres two points behind it, really. The first is that in terms of the global markets, about 90% of our benchmark is in developed markets. So thats a starting point. The second point is that when we look at the world, it comes back to our framework, which is valuation, conviction and insight. And theres a lot of high-quality companies in the developed market.

With regards to emerging markets, we have the flexibility to go anywhere in the world. We do invest in emerging markets. We have HDFC Bank Ltd ADR (NYSE:HDB), in India, one of the highest return-on-equity banks in the world. We still see significant runway for growth there. We also have Walmex in Mexico, which is the Walmart of Mexico. We think theres quite attractive dividend yields coming from the company, with a decent runway of growth, particularly within e-commerce for that name, but also names such as Samsung Electronics Co Ltd DR (LSE:SMSN) or Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM). Some of the best semiconductor manufacturers in the world can be found in the emerging markets.

Outside that, we always have some issues with regards to corporate governance, and sometimes its more attractive to buy European stocks that are tapped into emerging market growth. Names such as Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC), [which is] sort of playing to that higher demographic income, and the growth that were seeing there.

Kyle Caldwell: Thats good to hear, and, James, thanks for your time today.

James Cook: Thank you very much. 

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

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