Finding equity returns in the U.S.

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Nigel Warren
6 years ago
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1 Finding equity returns in the U.S. Challenges and opportunities

2 Our panelists Chris Jones, CIO, U.S. Growth & Small Cap Tom Luddy, Portfolio Manager, Large Cap Core and Large Cap Core Plus 130/30 Clare Hart, Portfolio Manager, Equity Income 1

3 There is plenty of room for valuation recovery DDR spread: Undervalued stocks vs. average DDR Spread 25th percentile 50th percentile 75th percentile High opportunity 12% 11% Internet bubble Accounting scandals Credit crisis 10% 9% 87 crash S&L crisis Spreads at 12/31/11 (Percentile: 81%) 8% 7% Current level (Percentile: 87%) 6% 5% 4% Low opportunity Source: J.P. Morgan Asset Management proprietary dividend discount model. A dividend discount rate (DDR) is the discount rate which equates the present value of the estimated stream of future dividends to the current market price. The JPMorgan S&P 500 DDR is a bottom-up, sector-neutral and capitalization-weighted average of dividend discount rates (DDRs) on large-capitalization stocks as estimated by J.P. Morgan Asset Management equity research analysts. A DDR does not represent a stock's expected actual return in any given time period. Shown for illustrative purposes only. As of May 31,

4 Risk management is an essential component of our Large Cap Growth Fund investment process The key risks we seek to manage are: 1. Don t miss the truly outstanding stocks; it is difficult to outperform if you don t own them 2. Just as important is mitigating exposure to the disaster stocks 3. Understand when the market is favorable for our approach and take greater risks at that time. If the market is more challenging for our approach, reduce the level of risk-taking 3

5 The active risk profile of the portfolio fluctuates based on the conviction and diversification of our ideas from the bottom up Active share 80% 75% 73% 74% 73% 76% 75% 74% 73% 75% 74% 74% 70% 65% 68% 68% 66% 67% 65% 65% 66% 69% 66% 67% 66% 64% 65% 60% 58% 61% 62% 61% 55% 50% Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Source: J.P. Morgan Asset Management, Frank Russell Company; as of 3/31/12. Shown for illustrative purposes only. Active share relative to the Russell 1000 Growth Index. Active Share is a measure of the percentage of stock holdings in a manager's portfolio that differ from the benchmark index. Active Share is calculated by taking the sum of the absolute value of the differences of the weight of each holding in the manager's portfolio versus the weight of each holding in the benchmark index and dividing by two. 4

6 Dividends are important, but so is the ability to pay the dividend quality matters The best-performing stocks over the past 20 years have been those with above-average dividend yields and below-average payout ratios Focus on payout ratio, not just the company s dividend yield Low payout ratio indicates a disciplined use of capital by management Companies still have ample cash to reinvest for future business growth A company s earnings stream should: Support the current yield even in difficult markets Equal-weighted performance from December 31, 1990 to March 31, % 350% 300% 250% 200% 150% 100% High dividend yield, Low payout ratio Low dividend yield, Low payout ratio No dividend High dividend yield, High payout ratio S&P 500 Low dividend yield, High payout ratio 50% 0% Source: Credit Suisse Quantitative Equity Research. Past performance does not guarantee future results. There is no assurance or guarantee that companies that issue dividends will declare, continue to pay or increase higher dividends. Chart is shown for illustrative purposes only. U.S. equities returned 6% on average since However, without dividends the annual gain drops to 1.7%; Treasury bonds returned 2.1% during the same period. According to inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG

7 Equity Income employs a three-step investment approach Our bottom-up fundamental philosophy targets high-quality U.S. companies with attractive valuations and healthy dividend yields 1. We focus on QUALITY first We target companies with durable franchises, consistent patterns of earnings, high return on invested capital (ROIC), conservative financials and strong management teams 2. Valuation is critical to our entry and exit points 3. Dividends enhance total return We focus on companies with attractive dividend yields and low payout ratios The manager seeks to achieve the stated objectives. There can be no guarantee the objectives will be met. There is no assurance or guarantee that companies that issue dividends will declare, continue to pay or increase higher dividends. 6

8 JP Morgan Large Cap Growth - We are positioned for secular growth across multiple sectors The lines between the technology, media and consumer sectors are blurring Apple, Amazon.com Companies are creating dynamic business models through the power of the internet Salesforce.com, Priceline.com, Cognizant Technology Growth in developing countries and the emergence of a larger middle class is creating opportunities BorgWarner, Starbucks, MasterCard Healthcare companies that are delivering innovative solutions are being rewarded Alexion Pharmaceuticals, Intuitive Surgical, Biogen As of March 31, 2012 The securities highlighted above were selected based on significance and are shown for illustrative purposes only. It is not a recommendation. 7

9 JPMorgan Equity Income Fund Portfolio positioning As of April 30, 2012 Absolute vs. Relative sector weightings 22.5% Absolute Relative 13.8% 4.5% 11.5% 10.8% 10.4% 1.5% 9.3% 0.0% 7.4% 6.0% 5.0% 2.4% 3.5% -4.0% -0.3% -1.5% -0.3% -1.2% -1.2% Financials Consumer Discretionary Energy Health Care Information Technology Industrials Consumer Staples Utilities Materials Telecom Services Source: J.P. Morgan Asset Management, Wilshire (excludes cash). The benchmark is Russell 1000 Value Index. Please see disclosure page for index definitions. 8

10 Where we have seen opportunities for JPMorgan U.S. Equity Fund investment theme: Cyclical sectors have ample room to improve Light vehicle sales Millions, seasonally adjusted annual rate 24 Portfolio positioning Auto OEMs and part suppliers Average: 15.1 Feb. 2012: 15.0 Housing related companies such as homebuilders and Do-It-Yourself (DIY) Technologies companies, such as semiconductor equipment companies 10 8 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Housing starts Thousands, seasonally adjusted annual rate 2,400 2,000 1,600 1, Average: 1,446 Real capital stock % change, private nonresidential equipment and software Feb. 2012: '75 '80 '85 '90 '95 '00 '05 ' Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom left) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management. Capital goods orders deflated using the producer price index for capital goods. Data reflect most recently available as of 3/31/12. Real capital stock data as of 12/31/

11 Results: Excess returns As of May 31, 2012 JPM Equity Income Fund (Select: HLIEX) Morningstar Overall Rating Large Value Ranking JPM U.S. Equity Fund (Select: JUESX) Morningstar Overall Rating Large Blend Ranking JPM Large Cap Growth Fund (Select: SEEGX) Morningstar Overall Rating Large Growth Ranking 3 yrs 5 yrs YTD 1 yr 3 yr 5 yr 10 yrs Select Russell 1000 Value Index Excess Select S&P 500 Index Excess Select Russell 1000 Growth Index Excess The performance quoted is past performance and is not a guarantee of future results. Mutual funds are subject to certain market risks. Investment returns and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data shown. For performance current to the most recent monthend, please call Source: Morningstar. Morningstar Ratings as March 31, 2012, for funds with greater than three-year track record. Past performance is no guarantee of future results. Different share classes may have different ratings. JPMorgan Equity Income Fund: 5 star Overall Rating (Select Shares); Large Value Category; 1,127 funds.three-year period, 5 stars; 1,127 funds. Five-year period, 5 stars; 996 funds. Ten-year period, 4 stars; 571 funds. JPMorgan U.S. Equity Fund: 4 star Overall Rating (Select Shares); Large Blend Category; 1,580 funds. Three-year period, 4 stars; 1,580 funds. Five-year period, 4 stars; 1,376 funds. Ten-year period, 4 stars; 817 funds. JPMorgan Large Cap Growth Fund: 5 star Overall Rating (Select Shares); Large Growth Category; 1,478 funds. Three-year period, 5 stars; 1,478 funds. Five-year period, 5 stars; 1,279 funds. 10-year period, 4 stars; 804 funds. Ratings reflect risk-adjusted performance. Please see disclosure page for index definitions

12 J.P. Morgan Asset Management Contact JPMorgan Distribution Services at for a fund prospectus. You can also visit us at Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing. This document is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political and economic risks. RISKS ASSOCIATED WITH INVESTING IN THE FUND JPMorgan Equity Income Fund The price of equity securities may rise or fall because of changes in the broad market or changes in a company s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for the Fund s portfolio or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to stock market risk, meaning that stock prices in general (or in particular, the prices of the types of securities in which a fund invests) may decline over short or extended periods of time. When the value of a fund s securities goes down, an investment in a fund decreases in value. The Fund may invest in derivatives, which may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the Fund s original investment. Many derivatives create leverage, thereby causing the Fund to be more volatile than it would be if it had not used derivatives. RISKS ASSOCIATED WITH INVESTING IN THE FUND JPMorgan Large Cap Growth Fund, JPMorgan U.S. Equity Fund The price of equity securities may rise or fall because of changes in the broad market or changes in a company s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for the Fund s portfolio or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to stock market risk, meaning that stock prices in general (or in particular, the prices of the types of securities in which a fund invests) may decline over short or extended periods of time. When the value of a fund s securities goes down, an investment in a fund decreases in value. 11

13 J.P. Morgan Asset Management The performance quoted is past performance and is not a guarantee of future results. Mutual funds are subject to certain market risks. Investment returns and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data shown. For performance current to the most recent monthend, please call , Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its providers; (2) may not be copied or distributed; (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damage or losses arising from any use of this information. For each fund with a three-year history, Morningstar calculates a Morningstar Rating metric each month by subtracting the return on a 90-day U.S. Treasury bill from the fund's load-adjusted return for the same period, and then adjusting this excess return for risk. The top 10% of funds in each broad asset class receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and 10-year (if applicable) Morningstar Rating metrics. Past performance is no guarantee of future results. Different share classes may have different ratings. The MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity market performance of emerging markets. The Russell 1000 Index is an unmanaged index that measures the performance of the 1,000 largest companies (on the basis of capitalization) in the Russell 3000 Index. The Russell 1000 Growth Index is an unmanaged index that measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value Index is an unmanaged index that measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Index is an unmanaged index that measures the performance of the 2,000 smallest stocks (on the basis of capitalization) in the Russell 3000 Index. The S&P 500 Index is a capitalization-weighted index that measures the performance of 500 large-capitalization domestic stocks representing all major industries. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Total return assumes reinvestment of dividends and capital gains distributions and reflects the deduction of any sales charges, where applicable. Performance may reflect the waiver of a portion of the Fund's advisory or administrative fees for certain periods since the inception date. If fees had not been waived, performance would have been less favorable. There can be no assurance that the professionals currently employed by J.P. Morgan Asset Management will continue to be employed by J.P. Morgan Asset Management or that the past performance or success of any such professional serves as an indicator of such professional's future performance or success. J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMorgan Distribution Services, Inc. is a member of FINRA/SIPC. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. JPMorgan Chase & Co.,

U.S. Equity: Returning shareholder value in a recovering market FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

U.S. Equity: Returning shareholder value in a recovering market U.S. Equity market overview 1 Despite sluggish economic growth, profits are very strong S&P 500 Earnings Per Share Operating basis, quarterly