Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan American. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
The big story of the stock market over the past decade has undoubtedly been the rise of US technology companies.
The so-called ‘FAANGMs’ – Facebook, Apple, Amazon, Netflix, Google, and Microsoft – have seen their combined market caps rise from just over $1trn at the start of 2013 to almost $10trn in 2021. Their share of the S&P 500 increased from 9% to 25.5% in the same period.
Quite understandably, that has meant these ‘growthy’ companies have come to dominate both the news cycle and many investors’ portfolios, especially if those portfolios are focused on the US. Companies which do not fit the ‘growth’ description – value stocks – have been left behind at the same time.
One style fits all?
But recent rotations between value and growth stocks have been taken by some as a sign that the growth-dominated market we’ve seen over the past decade is being replaced with one in which no style of investing reigns supreme.
JPMorgan American (JAM) is well positioned to cope if that’s the case. The trust counts some of the FAANGMs - Microsoft, Apple, Google owner Alphabet, and Amazon - among its four largest holdings.
However, its management team splits its portfolio between value and growth stocks, with the two styles allowed a maximum 60:40 allocation in either direction.
The result is a diverse portfolio that deviates strongly from its benchmark index, the S&P 500. It’s also a strategy that’s paid off, with the trust producing 117.9% total returns in share price terms in the five years up until December 20th 2021, compared to the 104.6% the S&P 500 delivered during the same period.
There’s still value in the US
Given the exposure the trust has to value stocks that may surprise some. After all, the driver of US returns is supposed to have been tech and not value. And yet JAM has managed to outperform despite the average price-to-earnings ratio of its portfolio being below its benchmark’s.
There’s also a perception that the US, partly as a result of the long bull market in tech stocks, is now trading at an extremely high level. Indeed, the S&P 500 continues to trade at a higher average earnings multiple than all other major markets. In such circumstances, talking about large cap value stocks seems like an oxymoron.
Averages are often misleading though and a quick glance over the JAM portfolio shows that there’s still value to be found in the US market. Companies like Capital One, ConocoPhillips, and AbbVie have all delivered strong returns over the past five years, despite trading at earnings multiples of less than 10.
Diamonds in the rough
Finding these stocks can be a difficult task, particularly for a trust like JAM which has more than 90% of its holdings in large cap stocks. That might sound paradoxical given the US is arguably the most heavily researched market in the world.
But that’s actually what makes things so tricky. The large amount of coverage and interest it receives means the US market is arguably more efficiently priced than many of its peers around the world.
As a result, it takes more effort, when it comes to making value plays, to sort the wheat from the chaff and identify good buying opportunities.
This is an area where JAM’s resources can prove extremely useful. The team has access to more than 40 dedicated US equity analysts, including a group focused solely on value stocks, many of which are sector specialists.
The right picks
These analysts are guided by an overlaying focus, put forward by portfolio co-manager Jonathan Simon, on identifying durable franchises with strong cash flows.
This has resulted in some standout performers over the past couple of years. Retail investment firm Charles Schwab was added to the portfolio in 2019 and has seen its share price double since then.
So well has the company done that it has arguably shifted from being a value stock to sitting in the trust’s growth bucket.
A more recent addition to the portfolio is Weyerhaeuser, a real estate investment trust (REIT) that is the largest private owner of timberland in the US. The JAM team believe the REIT stands to benefit from increasing demand for homes in the US, with new construction projects reaching all-time highs in 2021.
That may make it seem like this is more of a growth opportunity but JAM was able to acquire shares in Weyerhaeuser at a forward P/E ratio of 11 – almost half the 20.5 that the S&P 500 is trading at.
Striking a balance
Growth as a style is almost certainly not dead. Technological advances – think internet shopping and electric cars – continue to provide a strong case for it, but it seems likely that neither will it continue to be the only show in town. With that in mind, in our view, combining the two styles works and has the potential to deliver outsized returns.
JAM itself has been around since 1881 but Simon and his co-portfolio manager Timothy Parton, who handles the growth side of the trust, have only been managing the trust since March 2019. The early signs are positive, with the two managers delivering a benchmark beating performance since taking up their current remit.
And the pair’s ability to navigate the tumult of the past couple of years indicates why JAM could appeal to those looking to have a core US holding in their portfolio.
The balance they’ve achieved between growth and value shows that, by taking an active approach to the market, you can still see strong returns in the US, without having to go all-in on tech stocks.
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