These will have strong balance sheets, good cashflow generation and a trustworthy management team with a long-term strategy for dividends and capital deployment. Hart is backed by JPM’s considerable analyst capacity, with the group spending in the region of £150bn on research worldwide every year. Harris says the insights of these career analysts are a key reason why larger groups can beat the efficient US market, with JPM’s consumer specialist having met the last five CEOs of Coca Cola for example. Looking at performance in recent years, stockpicking in financials has been key, as much what the fund avoided as what the team chose to own. “We have had no exposure to large-cap diversified banks, avoiding names like Citigroup, Bank of America and Goldman Sachs on concerns about their earnings stability,” adds Harris. “Stocks like BoA are very cheap at half times book value but we struggle to look past those concerns. Instead, we have owned asset managers like T Rowe Price and Blackrock and insurers such as Prudential, which can offer our required earnings stability through their recurring revenues.”
Another favoured sector is consumer discretionary, with Harris noting apparel manufacturers such as VF, which owns brands such as Timberland, Wrangler and Vans, and Limited Brands. “We also like entertainment businesses such as Time Warner and Cinemark, with the latter benefitting from a recent uptick on box office and expanding into Latin America,” she says. While the JPM fund is underweight technology, Harris says its 10% stake is the largest position for several years. “Technology companies currently have the most cash on their balance sheets and we would like to see more of them putting this to work for shareholders,” she adds. “In the past, there was a feeling among tech stocks that paying a dividend would see them perceived as ex-growth but Apple and Dell have led the way on distributions and we expect more companies to follow suit. Tech is definitely an area where consumers become brand dependent, meaning companies like Apple are building huge barriers to entry.”
Sell-off opportunities
Looking forward, Harris says the US market has climbed a wall of worry since the credit crunch lows, up 100%, but is still not expensive at 13 times forward earnings against a long-run average of 16 times. This means there is room for upside but Harris says JPM always expected the end of 2012 to be volatile, with concerns about the debt ceiling and fiscal cliff coming to the fore. “For us, sell-offs create an opportunity to buy – as we have done with Apple for example – as we remain convinced of fundamental US strength,” she adds. “On the fiscal cliff, we are convinced politicians will not allow it to happen and encouraging noises are already emerging. At present, the two things missing from recovery are consumer spending and Capex and with both teed up, no one wants the fiscal cliff situation to push America into a recession it would struggle to escape from.” Harris remains convinced of the merits of US equities but warns it is not a market to time. Over the last 20 years, the annual return on the S&P 500 has been 7.8%, but if you missed the best 10 days during a year, that return halved. “Our view is that if you believe in US equities, you should invest for the long term, which allows us to put things like the fiscal cliff into perspective,” adds Harris. “US Equity Income is a conservative fund and we will underperform in high-beta or momentum conditions such as year to date. But we would rather lag fast-rising markets than underperform in down conditions and we have never done the latter in the 10 years of the strategy.”
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