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

A quality-first approach for volatile markets: JPM 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 Equity Income Fund, to tell us why her quality-first approach to investing in value stocks provides compelling opportunities for investors looking for equity exposure, but who are wary of what’s been a bumpy ride.

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

Historically, a focus on high quality dividend paying companies with strong management teams has helped investors share in the 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 Russell 1000 Value Index, see chart below.  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. Data from 1/1/09 through 12/31/15. Each yield/payout ratio illustrates compounded total returns: price appreciation and dividend payout. The benchmark is the equal-weighted Russell 1000 Value Index. The chart is designed to illustrate that companies with a high yield and low payout ratio have outperformed, historically. Chart figures do not represent investable vehicles as each category is rebalanced monthly. Shown for illustrative purposes only.

2015 was a difficult environment for 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 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 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 plenty of 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 diapers. The stock sold off a bit last year on concerns about its emerging market exposure. But what people don’t realize 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 stabilize 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.

Learn more about J.P. Morgan’s Equity Income Fund   

Related funds

Equity Income Fund
The Equity Income Fund focuses on high-quality companies with healthy and sustainable dividend yields, providing a conservative way to participate in U.S. equity markets.

SELECTED RISK: The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for the Fund’s portfolio or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to “stock market risk,” meaning that stock prices in general (or in particular, the prices of the types of securities in which a fund invests) may decline over short or extended periods of time. When the value of a Fund’s securities goes down, an investment in a Fund decreases in value.

There is no guarantee that companies that can issue dividends will declare, continue to pay or increase dividends.