“We’re long-term investors, looking at trends,” says Harris.
Hart and her team meet the management of every company she invests in on a regular basis to ensure they remain high quality. “We want to know what they’re doing with their capital,” says Harris. “Those with a free cash flow yield of 5% are of interest to us.” Hart takes advantage of market volatility to allocate assets within the fund. “Quality companies are the best hedge against volatility, but it’s difficult to get value and quality together,” Harris adds. “We’re looking for quality of balance sheets.” She cites paper product manufacturer Kimberly Clark as a good example. “It’s got a proven management team and long-term sustainable growth potential.”
To be held in the fund, stocks must have a dividend yield of at least 2%, with Hart having a preference for companies with a low payout ratio (the fraction of net income a company pays to its shareholders in dividends). “We like those companies who leave enough earnings that they can reinvest in the business,” Harris continues.
Since the financial crisis in 2008 Hart has been rebuilding her position in financials through retail banks such as Wells Fargo, PNC and BB&T. “Banks have done well in a difficult, low interest rate environment,” says Harris. “Financials is the cheapest sector, and insurers such as Travelers and Prudential are the cheapest of those. We also like Ace, Discover and Capital One.”
Financials should benefit from a rising interest rate environment
Source: J.P. Morgan Asset Management, Wilshire. 1 reflects relative position to the S&P 500 Index. Date as of 29 February 2016. The fund is an actively managed portfolio; holdings, sector weights, allocations and leverage, as applicable are subject to change at the discretion of the Investment Manager without notice. The companies/securities are shown for illustrative purposes only and should not be interpreted as a recommendation to buy or sell.
Energy is another sector overweight in the portfolio, with Hart favouring integrated oil companies such as Exxon Mobil and Chevron which have been able to navigate volatile markets. Harris also highlights some companies in the technology sector such as Texas Instruments, which has increased its dividend and issued share buybacks. IT consulting company Accenture is another holding, which Harris believes has better growth potential than Apple over the next three years.
Harris puts the probability of a US recession this year as low as 10 to 15%. “There’s room to run in the housing market, we’re seeing wage growth and the consumer is doing fine. We’re looking at a slow and steady economic recovery – it could be the longest recovery ever. If you exclude the energy sector there is 7% earnings growth, and any improvement in the oil price will lead to better earnings.”
In the active versus passive investing debate Harris believes active managers such as Hart can outperform the S&P 500 index over time. “Active managers can target the better sectors, those paying higher dividends. They can add more value and ride the waves better than a passive manager.”
Five year fund performance
Source: Bloomberg as at 30th April 2016
Past performance is not a reliable indicator of future returns
“Many active US fund managers have struggled to beat the S&P 500 index, but JP Morgan Asset Management has dedicated a lot of resources to this fund, with two equity income specialists working alongside the fund manager,” says Michelle McGrade, chief investment officer at TD Direct Investing. “The fund manager and analysts’ compensation is linked directly to the fund’s performance, so it is in their interest to outperform over the long term.”
Find out more about the JPM US Equity Income fund.
Remember that each fund is unique and hence exposed to different levels of risk. Some are relatively low risk, whilst others can be very risky and those will only be appropriate for more sophisticated investors.
These are the views of the JPM US Equity fund managers and do not represent TD Direct Investing.
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