Buy, hold or sell: JPMorgan European IT Income

Published by Marina Gerner on 07 March 2016.
Last updated on 08 March 2016


Alexander Fitzalan Howard, co-manager of Money Observer Rated Fund JPM European IT Income, tells us what he's been buying, holding and selling.

Buy: Nokia (NYSE: NOK)

The income version of JPMorgan's European investment trust gives investors exposure to continental European markets. Since its launch, the dividend has been either maintained or increased every year and the trust currently yields 3.6%.

Fitzalan Howard's strategy is to focus on the top 30% of the market by yield and avoid those companies whose dividends he thinks are going to be cut. His main effort is in trying to identify these companies.

One company he bought recently is Finnish mobile communications firm Nokia. "It has been a restructuring story," says Fitzalan Howard.

Nokia sold its handset business to Microsoft last year, which left it with just the network business and a large patent portfolio.

The firm then merged with Alcatel, and Fitzalan Howard expects many synergies and cost savings as a result.

"The company has mentioned about €9 million (£7 million) of savings - that's the consensus - but we think it could be a bit more," he says. Further, the manager believes management will be able to refinance the company.

"Interest expenses should come down later this year and next year, and the market is not really focusing on that yet," says Fitzalan Howard.

And the result of all that, he says, is that free cash flows are picking up nicely. "They have quite a bit of cash on the balance sheet." Fitzalan Howard bought Nokia in October 2015 for the first time, at a share price of 664p.

It makes up approximately 8% of the portfolio and as of 1 February is trading at 720p. The shares are currently yielding about 3% and he thinks this will be boosted by special dividends and share buy-backs in the future.

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Hold: Iberdrola (BME: IBE)

Fitzalan Howard holds quite a lot of utilities in the portfolio. He bought back into Spanish renewable energy firm Iberdrola in June 2013 for around 415p a share, having last held it more than three years previously.

He has since added to his position three times, most recently in June 2015. The firm accounts for approximately 1% of the portfolio and shares are trading at around 645p as of 29 January.

The manager finds Iberdrola particularly interesting, as it is experiencing good growth while earnings are being upgraded steadily.

There are a few reasons for that: first, electricity prices in Spain are higher than elsewhere in Europe; secondly, Iberdrola benefits from a weak euro because many of its assets are in the US and UK; and finally, according to Fitzalan, the company has a lot of renewable energy business.

Iberdrola is getting good returns from its renewables division, particularly offshore wind farms.

"So we're getting upgrades from that, and at the same time quite a lot of its businesses are in energy distribution networks, which tend to be regulated because they operate a RAB (regulated asset base) model," he says.

The benefit of Iberdrola having network assets in a RAB model is that the visibility of earnings is high.

Iberdrola shares yield about 4.3% and Fitzalan Howard expects the dividend to grow over the coming years. But he is not adding to his holding of the stock: "We've got a decent position in it, which we've had for a long time, and we're happy to run that."

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Sell: Santander (LON: BNC)

Fitzalan Howard originally bought into Spanish bank Santander in February 2015 at around 640p per share. "The story there was that last January they cut their dividend," he says.

At that stage he thought that this was a turning point for the company and that "things would be more secure going forward".

However, he had changed his mind by last summer, and the stock has continued to fall since then. Since Fitzalan Howard first bought into the bank, shares have fallen a painful 38.6% to 393p (as of 29 January).

The problem, he says, is that the company is suffering earnings downgrades driven by its big emerging markets exposure, particularly its business in Brazil, which is currently experiencing an economic recession. Additionally, the profitability of its Spanish business is under pressure.

Santander delayed the date for reaching its target return on tangible equity of 13% until 2018, because of problems in Brazil and elsewhere.

Although Santander's capital level is technically 'OK', according to Fitzalan Howard the market thinks it is still too low and it is certainly below that of many of its competitors. "The market is worried that the bank may have to raise further equity," he says. He sold out completely in September 2015 at 474p.