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On the face of it, these are tough times for income investors. Dividend cuts in the wake of the COVID-19 crisis have made for alarming headlines, as companies look to consolidate their balance sheets at the expense of shareholder income. UK investors have seen Royal Dutch Shell, 2019’s biggest dividend payer on the FTSE 100, cut its dividend for the first time since the Second World War.
But, in keeping with a wider theme to emerge as lockdowns are lifted, those companies which went into the pandemic with strong balance sheets and solid fundamentals have generally fared better than those which were already skating on thin ice.
It’s only quality companies like these which Clare Hart, veteran manager of the JPM US Equity Income fund, looks to hold in her fund - and for investors who have been charred by the dividend bonfire, her fund may provide a welcome source of income.
My colleague, Ed Monk, caught up with Fiona Harris, Investment Specialist behind the fund, to discuss the team’s aims and strategy.
Quality over quantity
Companies which Hart invests in can take her interest as a compliment. This is a fund which prioritises companies’ quality above everything else, and stocks which don’t meet its high standards won’t find a place in the portfolio.
Harris explains that this quality-focus takes priority over high-yields - for her, “quality comes first”. Theirs is not the highest-yielding fund, and it doesn’t aim to be. What they want instead is “consistency of earnings; good companies that over the long-term pay well; not to pay too much for those companies; and every stock has to pay a dividend yield of 2% or more”. This 2% threshold ensures that every company pulls its own weight, and that consistency of income across its approximately 90 holdings is as assured as possible.
Harris explains that the fund has three ways of assessing stocks’ quality. They look first to the quality of the management teams and the decisions they make. She explains how “our companies are awash with cash flow. How companies use that cash to us is really important.” Perhaps surprisingly for an income fund, companies that pile all that cash into their dividend pay-outs don’t appeal - she’s interested in teams which reinvest for the future and ensure consistent rather than excess income.
Next comes the quality of companies’ financials. Quality here is judged primarily by the strength of the company’s balance sheets. They like stocks which are conservative in their capital practices - this is a fund that likes sensible, reliable capital allocation over displays of largesse.
Then they look at the quality of the business - what is it’s USP; why do we buy its products repeatedly? Hart is looking for sustained income-producers - she needs to be confident that companies are not riding a temporary wave.
Clear investment process
Just as there is a clear idea of what comprises ‘quality’ in their eyes, Hart and her team of experienced investment analysts abide by a rigorous investment process which makes room only for an exclusive list of high quality, attractively valued, high dividend-yielding US equities.
Once they have assessed a company’s quality, they look at its valuation. Despite their ardent focus on quality, they will not pursue it at any price. Only companies which present reasonable value will find their way into the portfolio.
As Harris explains, their value-orientation means that volatile market conditions frequently present opportunities - “very often, volatility is our friend.” It puts solid but expensive companies which had previously been unattainable now within their grasp.
Finally, they look to the company’s dividend yield, only investing if it meets the fabled 2% threshold. As Harris explains, when you “add all that up together, we get a portfolio that’s more on the conservative side, that’s more on the value side, than anything else.”
This highly process-driven strategy puts Hart’s fund in a good place to navigate current volatility and an environment of dividend cuts. Harris explains how many of the fund’s holdings have actually increased their dividend payments this year.
Recent market conditions, though unprecedented, in many ways reinforce the benefit of strong, bottom-up analysis of companies’ fundamentals. It would be naive to say that companies which have been hit hardest by the pandemic are just those which were struggling anyway - but a strong balance sheet certainly won’t hurt.
More on JPM US Equity Income fund
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This fund takes its annual management charge and expenses from your capital and not from the income generated by the fund. This means that any capital growth in the fund will be reduced by the charge. Your capital may reduce over time if the fund’s growth does not compensate for it. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.