A quality-first approach for volatile markets: JPM US Equity Income Fund - J.P. Morgan Asset Management
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A quality-first approach for volatile markets: JPM US Equity Income Fund

Contributor Clare Hart

With the S&P experiencing a renewed bout of volatility, we asked Clare Hart, Portfolio Manager for the JPM US Equity Income Fund, to tell us why her quality-first approach to investing in value stocks provides compelling opportunities for investors looking for US equity exposure, but who are wary of what’s been a bumpy ride.

Why should investors consider a high-quality approach to US value investing?

Historically, a focus on high quality dividend paying companies with strong management teams has helped investors share in the US stock market’s growth while reducing some of the volatility. In today’s challenging market environment, we believe that a robust dividend policy can be a good indicator of quality, which is why we seek out companies that can pay – and that have the ability to continue to pay – attractive and growing dividends.

These types of stocks, with attractive dividend yields and modest payout ratios, have historically outperformed the S&P 500 Index. Identifying stocks with a modest payout ratio is key, as these companies retain enough capital after paying dividends to invest for future growth, providing us with both a growing stream of dividends and capital appreciation potential.

We focus on quality stocks with the ability to make regular and growing dividend payouts. This combination suggests that a company will likely maintain the ability to pay compelling dividends, with the potential for future growth and appreciation.

Source: J.P. Morgan Asset Management Quantitative Equity Research. The lines illustrate the growth of USD from 01.01.1990 to 30.06.2015. Each yield/payout combination illustrates compounded total returns: price appreciation + dividend payment. The benchmark is the equal weighted S&P 500 Index. Past performance is not necessarily a reliable indicator for future performance.

2015 was a difficult environment for US equity income investing. Why?

Over the long term, the types of high quality dividend paying stocks that we target have outperformed. But not every day – or every month.

In 2015, the US stock market was driven by expensive stocks that were getting even more expensive – internet giants like Facebook, Amazon, Netflix and Google, the FANGs. They were up 80% last year on average but don’t meet our dividend and valuation criteria, so when these types of stocks rally it can be a challenge. But when you take a long-term view, as we do, we believe quality is ultimately the best hedge against volatility.

Where are you currently finding the biggest opportunities?

At the moment, some of our highest conviction positions are in the financials sector, through banks such as Wells Fargo. The financials sector hasn’t rewarded us well over the past year, as reduced expectations for interest rate hikes have caused investors to exit a lot of names in the sector. But this has created some bargains.

Consumer-sensitive sectors are also throwing up some interesting opportunities. A lot of market volatility has been driven by worries over a weakening global environment, but when we look at domestic consumption, the situation looks much more positive. That’s why we’ve recently added a position in Kimberly Clark. This is a company that produces such essential daily items as your toilet paper, facial tissues and disposable nappies. The stock sold off a bit last year on concerns about its emerging market exposure. But what people don’t realise is that the majority of Kimberly Clark’s earnings are actually driven by domestic consumer demand. Since we initiated our position, the stock has performed strongly, so if volatility comes back into play we may get a chance to increase our exposure.

Where else is your focus on quality paying off at the moment?

The sharp fall in the oil price has created some particularly attractive opportunities in the energy sector. But only the strongest producers with the best management teams will be in a position to benefit when oil prices eventually stabilise and profits start to recover.

That’s why we like to own high quality established names – the Exxon Mobils and Chevrons of this world – that can hold their breath under water the longest, that have the strongest balance sheets and that can survive a long-term low price in the oil market. When you look at the portfolio over the last three years, we’ve had a positive relative contribution from our energy exposure, which is a great example of how we reduced the downside in a difficult environment.

Find out more about the JPM US Equity Income Fund >  

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JPM US Equity Income Fund
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Please be aware that this material is for information purposes only. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material.

The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.