Introduction
This means that in spite of concerns over corporate earnings not living up to expectations and fears about when exactly the Federal Reserve will start moving on interest rates, the performance of the US stockmarkets has, on the whole, been pretty strong.
For the year to date to August 6 2014 the MSCI North America index has posted the best returns at 3.42 per cent, closely followed by the S&P 500 index on 3.07 per cent and the Nasdaq Composite index at 2.93 per cent. All of these have significantly outperformed the MSCI World index over the same period, which delivered just 1.57 per cent, according to FE Analytics data.
But while the overall performance of the market has been good, the real driver for many investors remains income, with North America accounting for roughly 46 per cent of the total global dividends paid, according to research from the latest Henderson Global Dividend Index report.
Within the North America region the US accounts for 90 per cent of the dividends paid, and in the first quarter of 2014, this equated to approximately $86.48bn (£51.3bn).
The Henderson research shows that even excluding special dividends, changes in the timing of payments and index alterations, underlying US dividends in the first three months rose 16 per cent year on year.
Corporate earnings in the first quarter, and to some extent the second quarter, have so far helped to underpin some of the valuations in the US market, and supports the view that dividend payouts will be sustainable. But the question remains whether this will continue and what effect, if any, a rate hike in the US will have.
Tony Lanning, portfolio manager of the JPM Fusion fund range, notes that after a strong 2013 the first half of 2014 “has been more challenging” for US managers. Although he adds the macro backdrop remains positive.
“Many of the surveys for business spending and orders for capital goods look positive. While investors are poised for the start of a rate-tightening cycle, we expect the Federal Reserve to remain dovish and for interest rates around the world to stay low,” he notes.
“The Fed remains focused on jobs growth but we expect the labour market to continue to recover and, together with a continued recovery in house prices, to help support the confidence consumers need to go out and spend. US car sales, for example, are at their highest point in the current cycle.”
But he adds: “With the S&P trading near an all-time high it is crucial that companies’ earnings continue to meet expectations. First-quarter earnings came out better than expected and at the start of the second-quarter earnings season we have already seen the large banks beating market expectations. In spite of a more challenging 2014, US equities have rewarded investors.”
Income investors have so far been rewarded in the US market, but should rates tighten sooner than expected or the economic recovery starts to falter, then this may have an impact on the growth rate of US dividends in the second half of the year.
The picks
Capital International US Growth and Income
This £202m portfolio is a Luxembourg-based Sicav launched in 2002, which places an emphasis on dividends as a key part of total returns and so tends to invest in companies that grow their dividends over time. It is run by a trio of managers based in the US – Don O’Neal, Eric Richter and Ross Sappenfield – and has delivered consistent performance across one-, three-, five- and 10-year periods, including a 12-month return of 4.92 per cent.
JPM US Equity Income
Managed by Clare Hart and Jonathan Simon this £2.3bn fund is one of the largest in the IMA North America sector and has delivered a strong five-year return of 109.97 per cent compared with the sector average of 92.67 per cent. The fund invests in large- and mid-cap value stocks and focuses on undervalued companies with durable franchises and strong management teams that should generate superior returns in the long term. The largest sector weighting is to financials at approximately 24.1 per cent of the portfolio.
Editor’s pick
Jupiter North American Income
This £545m offering, which adopted its current income objective and name in 2007, has been managed by Sebastian Radcliffe since January 2001. Performance has been strong over the long term with a 10-year return of 147.44 per cent to August 6, significantly above the IMA North America sector average of 111.16 per cent, according to FE Analytics data. The fund invests predominantly in North American blue-chip companies, with the largest sector weighting to financials at 21.4 per cent of the portfolio.
