Best In ClassJun 30 2020

Best in Class: JPM US Equity Income

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Best in Class: JPM US Equity Income

Best in class: JPM US Equity Income

It is Independence Day this weekend – an event which typically sees more than $1bn spent on fireworks and some 150m hotdogs consumed, as the US celebrates the signing of its political freedom.

However, this year is likely to be very different, with events in some states significantly scaled down to minimise the threat of Covid -19.

With more than 120,000 deaths, the virus has hit the US harder than any other country.

The one bright spot is that dividends are under less pressure in the States than in the UK or Europe

The challenges are clear, and the Federal Reserve has forecast the US economy will shrink by 6.5 per cent this year, while some 45m Americans have filed for unemployment – a number not seen since the Great Depression of the 1930s. 

In June, the Congressional Budget Office director Philip Swagel warned that the pandemic will haunt the US economy for a decade, wiping close to $8tn off economic growth.

The one bright spot is that dividends are under less pressure in the States than in the UK or Europe. The general focus is instead on reducing share buybacks, which have been more prevalent in recent years.

Those looking for a core equity income holding investing in the world's largest stock market would do well to consider this week’s best in class.

The JPM US Equity Income fund focuses on high-quality US companies with healthy and sustainable dividends, while providing lower volatility access to US stock market growth.

While some would point to the naturally lower yielding nature of the US market, it has a long history of dividend payments, an increasing number of companies now paying a dividend and a number of dividend aristocrats – companies that have increased their dividends for 25 consecutive years or more.

The lead manager is Clare Hart, who is supported by co-manager Jonathan Simon. Ms Hart has worked at JPM since 1999. Before that she worked at Salomon Smith Barney in its equity research division covering Real Estate Investment Trusts.

The managers look for undervalued companies that exhibit durable franchises and strong management teams. These teams will demonstrate expertise in capital allocation, which will allow the company to generate free cashflow on which the valuation is based.

The investment process has four stages. The first of these is idea generation via a combination of research from the in-house analyst team, meetings with companies, industry conferences and some screening.

They then carry out fundamental analysis to see if there is any investment appetite for the stocks. This is based around three broad factors: the business or products, company management and financial/qualitative factors. 

Next, the managers will perform the valuation analysis, where they will look at a combination of market metrics, using both economic and market ratios. The managers will  also assess the quality and sustainability of a company's earnings.

The final stage is portfolio construction, where they target a minimum of a 2 per cent yield from each company at point of entry and will compile the portfolio with diversification in mind. Stocks are weighted between 1 per cent to 3 per cent, making for a reasonably flat portfolio.

As the team perform extensive research on stocks in a market which is difficult to yield, it is important that every name in the 80-110 stock portfolio should contribute without too much reliance on any one holding. Largest positions at present include Bank of America (2.8 per cent) and Johnson & Johnson (2.7 per cent).

The fund has done well in markets driven by fundamentals, where quality companies have been rewarded.

It has also held up in volatile markets due to its more conservative nature. In the past 10 years it has returned 236.5 per cent to investors and has a yield of 2.46 per cent. It has an ongoing charge of 0.79 per cent.

This fund ticks a lot of boxes and has an experienced manager backed by one of the strongest analyst teams around.

It is an ideal candidate to take advantage in uncertain times having demonstrated its ability to achieve an income, while also participating in long term capital growth.

Darius McDermott is managing director of FundCalibre