Recent years have been dire for shareholders in long-duration assets, with rising interest rates driving a de-rating of high-yielding alternatives trusts including infrastructure and real estate-focused funds to deep NAV (net asset value) discounts.

But there is now potential for significant re-ratings across this space as central bank rates decline and the competition from cash and government bonds decreases.

This is why a continuation vote failure (3 September) at the annual general meeting of JPMorgan Global Core Real Assets (JARA), whose portfolio straddles property and infrastructure, may look ill-timed with the benefit of hindsight.

From shareholders’ perspective, voting against continuation is understandable given frustrations with the trust’s poor performance and the wide double-discount to NAV (net asset value), 18.8% at the time of writing.

Yet ‘JARA’ had outlined a plan in June to reduce its troublesome real estate exposure over time in favour of non-real estate offerings with higher yields, while the wave of interest rates cuts could act as a powerful catalyst for a turn in sentiment towards the trust.

UNDERSTANDABLE FRUSTRATIONS

JARA is sub-scale with a lowly £154 million market cap and £190.2 million in net assets, and the quarterly dividend-payer has struggled to grow in order to get on the radar of a wider range of investors.

To recap, the company raised £149 million at IPO in September 2019 to invest in private real assets through private funds and managed accounts on JPM Asset Management’s Global Alternatives platform and came to market with a return target of 7% to 9% per annum, with 4% to 6% expected to come from dividends. Unfortunately, the trust has actually delivered total returns of 2.3% per annum since inception to 31 May 2024, or 5.7% per annum since becoming fully invested.

Shares highlighted the attractions of JARA, including its low correlation to traditional assets in June of this year, flagging its diversified exposure to quality real assets around the world, spanning property, infrastructure and transportation. Our view was JARA provided strong diversification alongside reliable income and growth and represented a unique vehicle providing retail investors with access to a cornerstone real assets investment strategy.

Arguably, the trust has not been helped by an overly diversified strategy, with at least 14 sub-sector allocations. And JARA was asking for further patience from shareholders in terms of its turnaround strategy. There was plenty of work left to do to re-direct its portfolio away from underperforming US office equity and more towards transport and infrastructure funds as planned.

WHAT HAPPENS NOW?

JARA’s board will now consult with shareholders on the best course of action to take. Proposals may or may not involve winding-up the company or liquidating all or part of the existing portfolio. In terms of the analyst reaction, Deutsche Numis noted that with the bulk of the portfolio invested in JPMorgan managed illiquid private funds, substantial capital returns over the near term would be restricted were JARA to pursue a managed wind down process.

A merger with another trust ‘may be hard to achieve’, warned Deutsche Numis, ‘given that the funds are managed by JPMorgan and they will take a long-time to realign to any proposed strategy’.

Stifel was ‘quite surprised’ that JARA failed its continuation vote, ‘especially as the shareholder register does not appear to have many activists that would typically push for this outcome’.

The broker added: ‘In our view, while there might be some low-hanging fruit in terms of capital being returned quickly, this could drag on for two or three years. It will be interesting to see whether the board sees the vote against continuation as a desire for shareholders to see the fund wound down with capital returned or whether it will look to provide further concessions to maintain the product.’

Also lending a view was Panmure Liberum, which observed: ‘At its current size and taking account of its performance track record since 2019, the prospect of raising equity in the medium term is slim. A managed wind-down seems the most likely route. While this will probably take a few years to complete, we think this is probably a better route for investors than pursuing the previously proposed turnaround plan.’

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