Build a good US core with less downside via JPM US Equity Income

Many investors are concerned that US equities are expensive versus other parts of the global equity market. And there are plenty of reasons to doubt that the good times will continue, including the economic impact of the coronavirus, the US election later this year and possible flare-ups in the global trade war.

So you may want to maintain US exposure via a more cautious approach that could mitigate any volatility. And a fund that could serve as a defensive core for your US equity exposure is JPM US Equity Income (GB00B3FJQ599). 

The growth-oriented, low-yielding nature of the US market means that this fund pays a relatively low income – despite its remit it had a yield of 2.14 per cent at the end of 2019. Rather, the fund’s appeal lies in its diversified and risk-conscious approach. Like other equity income funds, its focus on dividend-paying stocks leads it to companies with a more defensive approach.

The fund’s managers include Clare Hart, who has worked at JPMorgan Asset Management since 1999, and they are supported by a large team of analysts. They look for companies that are undervalued by the market, but have durable franchises and strong management teams. They also like companies to have a competitive edge and recurring demand for a product or service, and look for evidence of good capital allocation decisions at the business.

The fund is well diversified, and tends to hold between 85 and 110 stocks. It had 91 holdings at the end of 2019, according to FE Analytics, and tends not to have significant positions in individual holdings. Its largest holding at the end of 2019 was Bank of America (US:BAC), which accounted for a 3.4 per cent of its assets. Its managers' bottom-up approach – selecting stocks on the basis of their own merits rather than sector or economic considerations – means that the fund can deviate from its benchmark, the S&P 500 index, in terms of sector exposures. For example, JPM US Equity Income had a 14.2 per cent overweight in financials versus its benchmark at the end of last year and was 13.2 per cent underweight information technology stocks.

The fund’s managers' approach has tended to result in the fund performing better than the S&P 500 index during periods of volatility. Although it fell around 8.5 per cent in sterling terms over the last three months of 2018, when markets sold off aggressively, this was less than the S&P 500's 12.2 per cent fall and the Investment Association (IA) North America fund sector average – a fall of 12.8 per cent. The fund was down 0.4 per cent during calendar year 2018 when the IA North America sector average was a fall of 1.4 per cent.

However, JPM US Equity Income also tends to lag the S&P 500 index when it is rising strongly. For example, in calendar year 2019 the fund returned nearly 23 per cent in sterling terms, slightly behind the S&P 500’s 23.9 per cent return and the IA North America average return of 24.4 per cent.

However, the fund offers exposure to a market that has had a good run but which faces a number of potential headwinds. So its diversified approach and proven ability to mitigate downside mean that JPM US Equity Income looks like a good way to get more defensive exposure to US equities. Buy. DB