JPMorgan Asset Management’s Garrett Fish has said he wants more stock-specific risk to return to the market to increase disparity between company share prices.
Mr Fish, who runs the group’s £718m American Investment Trust, said stock-specific risk was now lower than it used to be, which meant more company share prices moved in lockstep with each other, thus presenting less opportunities.
“In an ideal world I would like to see more stock-specific risk,” he said.
“There used to be more controversy in specific stocks. I’m not attracted to controversy, but it often gives valuation support for the share price to appreciate.”
He added: “The trust is more likely to outperform when there is more stock-specific risk in the market. When it is all macro risk, it is more difficult to outperform since everything goes up and down together.”
The manager said his turnover in 2013 had been 55 per cent; “not high” compared to the industry but high compared to the trust’s 24 per cent figure for 2012.
Mr Fish said the size of his active bets had been “lower than normal” and that while he could have a position in a stock that was 500 basis points above or below its market weight, the correlation of the portfolio with the benchmark was “higher than it has been in the past”.
In terms of the manager’s sector calls, he said he remained bullish on technology but cautioned on valuations in some stocks. “I would say 90 per cent of the tech sector is undervalued,” he said.
“And the other 10 per cent, which includes Facebook, LinkedIn and Tesla, are overvalued.”
Mr Fish said technology was his largest absolute and relative weighting with key overweights in Microsoft, Apple, Hewlett Packard and Oracle.
“I’m overweight the big uglies,” he explained. “They are on 9-14x earnings – they have growing earnings and cash on the balance sheet.
“If we get tax reform we could see them repatriate that cash.”
The manager said he also still saw “decent earnings growth” in healthcare and financials, but viewed materials, utilities and real estate investment trusts as “overvalued”.
“I find consumer staples less overvalued now,” he added. “Last year, valuations were high but in the past 12 months the sector has been weaker, so I am starting to find more value there.
“If we see more fireworks in emerging markets, then I will get more interested in the large consumer staples companies. If they are involved in countries that get punished, it might provide an opportunity and that is what I am looking for.”
In terms of gearing – a form of borrowing that amplifies both positive and negative returns – Mr Fish said the trust had roughly 9 per cent gearing at present.
This means its exposure to the market is 109 per cent. Mr Fish pointed out an agreement had been struck with the board that in “normal market environments, which I consider us to be in now”, the trust would have a gearing level of 10 per cent, plus or minus 2 per cent.
“If the market falls 20 per cent I will probably break those bands and go higher, but in a normal market environment we will be 108 per cent to 112 per cent exposed to the market,” he said.
Since Mr Fish took on the trust in January 2003 it has delivered a share price total return of 193.7 per cent compared to the S&P 500 index’s 139.6 per cent return in sterling terms, according to data from FE Analytics.
What will drive US share prices this year?
The key debate in US equities at present revolves around the question of what will drive US company share prices higher.
Garrett Fish, manager of JPMorgan Asset Management’s American Investment Trust, said the majority of the S&P 500’s rise of 30 per cent or so in 2013 came from multiple expansion – essentially prices being pushed higher without any improvement in company fundamentals.
The manager said the only time he recalled multiple years of multiple expansion was in the 1990s.
“I don’t think this is going to be a repeat of the 1990s,” he said. “We don’t have the growth in the US or the global growth.”
The manager added that earning growth estimates were “not as rosy as estimates are right now” but this did not mean he was bearish.
In the trust’s 2013 results released recently, Mr Fish said he did not expect the market to “repeat the impressive returns that were generated in 2013”, but expected profit growth could be in line with the long-term average.
“Earnings growth of roughly 8 per cent is our best guess for 2014, helped by continued buybacks of equity at a rapid pace, and probably again sweetened with faster growth in dividends as cash flows remain strong,” the manager said.
He added that he expected “much less of a rise in price/earnings this year”, with a starting multiple on his estimates at more than 16x compared to 13x a year ago and 9x at the “depths of despair in early 2009”.
