03 Apr 2019
Contributor Clare Hart
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When it comes to investing in the world’s largest economy, the £3 billion JPM US Equity Income Fund really stands out from the competition (as of 28 February 2019). Portfolio manager Clare Hart explains how the fund’s exclusive focus on quality, value and dividends allows it to share in the long-term growth of the US stock market while keeping a lid on volatility whenever the going gets tough.
Home to some of the world’s largest companies and strongest brands, the US stock market commands a significant allocation in most diversified investment portfolios. However, while US equities provide the potential for strong long-term returns, periods of volatility can be unsettling – even for the most experienced of investors.
That’s why we focus only on high-quality, attractively valued US stocks that pay a consistent dividend. We believe companies with these characteristics can better withstand the market’s ups and downs and ultimately provide investors with attractive returns over the long term.
The results of this more conservative approach are clear – since its launch back in December 2008, the JPM US Equity Income Fund has participated in the growth of the US stock market while delivering significantly lower volatility returns, with less exposure to falling markets compared to the median fund in its sector.
The fund’s success is built on our commitment to fundamental company research and long-term investing. We don’t look for short-term gains by focusing on the fast-moving headline grabbers, but instead we seek to capitalise on the significant long-term value that can be found among America’s many stable, high-quality companies. These quality stocks have tended to perform well during periods of economic weakness, so have the potential to add resilience to portfolios.
S&P 500 Quality/S&P 500 Relative Performance
Relative total return index level, rebased to 100 in
Source: J.P. Morgan Asset Management Quantitative Beta Strategies, Standard and Poor's, J.P. Morgan Asset Management. S&P 500 Quality Index is the top quartile quarterly stocks in the S&P 500 determined by JPMAM Quantitative Beta Strategies based on measures of profitability, financial risk and earnings quality. Periods of "recession" are defined using US National Bureau of Economic Research (NBER) business cycle dates. Past performance is not a reliable indicator of current and future results. Data as of 31 August 2018.
We focus particularly on established companies with strong franchises, stable profits and low dividend payout ratios (which means the company’s dividend is only a relatively small part of its profits). This combination suggests that a company will likely maintain the ability to pay compelling dividends, with the potential for future growth and appreciation.
To identify these high-quality opportunities, we spend the time to really get under the skin of the stocks we cover. Supported by a team of more than 25 experienced sector analysts, we regularly meet with management teams and take the time to fully analyse the numbers, building up a complete picture of the opportunities and risks posed – often over many years.
Whenever we uncover a stock with the characteristics we seek, our intention is to invest for the long term. Fifteen of the fund’s current holdings – representing around 25% of the fund’s assets as of 28 February 2019 – have been constant portfolio fixtures since the fund was launched more than a decade ago.
One ever-present holding is oil producer Chevron*. Incredibly, the company has grown its dividend for the last 32 consecutive years, making it one of Wall Street’s true dividend aristocrats. Thanks to a diversified business model, disciplined capital spending and strong balance sheet we believe Chevron should be able to continue to return significant cash to shareholders through a variety of energy price environments.
Another core holding that we’ve held since launch is drug maker Pfizer*. The company has paid a dividend consistently since 1980 and has increased its payout for the last nine years. Supported by a low payout ratio, well-diversified, high-quality drug pipeline and attractive profit margin, we believe Pfizer can sustain its dividend for many more years to come.
Our disciplined long-term approach helps ensure risk is managed within the fund at all times, while also leaving room to take advantage of market weakness to buy quality companies at lower valuations. There are a number of components to our risk management process that allow to manage it but not necessarily reduce it.
First, while the fund is benchmark agnostic, that doesn’t mean we take huge bets. In fact, a high degree of diversification across sectors, and within sectors and subsectors, is a hallmark of our strategy. Even when you have done as much due diligence as you possibly can across sectors, bad things can happen to good companies. Being diversified helps mitigate against that risk although it does not negate it fully.
Most importantly as a value manager we focus at all times on avoiding “value traps” – those stocks that look cheap but continue to get cheaper. We do this by identifying effective management teams. By investing in a dividend paying stock with a 30% payout ratio, for example, shareholders are leaving the company’s management 70 cents on the dollar to play with. The question we ask is: can the management team make more money by using the money not returned to shareholders effectively? That’s what will drive share price appreciation.
For investors looking to share in the growth of the world’s largest stock market, an equity income investment strategy can provide particularly effective exposure – capturing a significant proportion of the market’s potential upside, while managing downside risk.
The JPM US Equity Income Fund has generated attractive, lower volatility returns from US equities for over 10 years. Find out how your US equity allocation could benefit from our high-quality dividend approach and the expertise of our experienced portfolio management team.
*The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
1 Since inception standard deviation for the JPM US Equity Income Fund has been 12.4% compared to 13.7% for the median fund in the IA North America sector. Since inception downside capture relative to the IA North America sector has been 90% for the JPM US Equity Income Fund and 105% for the median fund in the IA North America sector. Source: Factset, J.P. Morgan Asset Management, Morningstar. All performance details relate to A (net acc) GBP unless otherwise stated. Fund inception date is 15 December 2008. Past performance is not a reliable indicator of current and future results.
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