JPM Global Equity Income

Investment process

The investment process, which has been in existence since 2007, is built on the analysis conducted by JPM’s global research platform of over 90 analysts who are based in Europe, the US and Asia. They collaborate closely with the fund’s managers, giving them an on-the-ground research presence, and cover around 2,500 stocks in total, which they narrow down to a portfolio of around 40-90 holdings.

The managers have three sources for ideas - high growth, high yield, and compounders (the core of the portfolio). They start by looking at, and understanding, the structure of an industry, with the help of the global sector teams, to produce an industry framework, identifying long-term trends and how a business sits within these, which companies are winners and which are losers, taking a 5 to10-year view.

Potential holdings are assessed through three lenses:

Economics: does the company produce good returns for shareholders? They look at all factors that might influence the amount of capital needed to run a business, and how that capital is used, to understand that company’s economic returns.
Duration: can the observed returns be sustained in the future? The team needs to feel confident in a company’s ability to sustain returns, having considered the potential impact a range of risk factors and management choices would have on a business.

Governance: will the expected returns accrue to shareholders in full, or be impaired by poor governance? The team examines factors like management competence, capital allocation and shareholder focus.

Once the analysts have looked at these three elements, they will assign each company one of four strategic classifications - premium, quality, trading and structurally challenged. The classification of a company is reviewed on a regular basis.

The managers follow a buy and hold strategy, only selling a stock if they believe that it no longer exhibits the characteristics that, in their opinion, support a resilient or growing dividend, or if the valuation no longer appears attractive relative to alternatives.

While ‘compounders’ make up the bulk of the fund (usually around 50%), the managers can diversify the returns and risk by having some holdings in both the high growth and high yield buckets, depending on valuations in the market. Dropping the yield requirement means they can invest in some of the more growth-style stocks, like cloud computing, whereas taking a higher yield allows them to take more macroeconomically sensitive ideas. This helps diversify the income stream in terms of taking on a bit more income and providing a bit more defensiveness. Correlation between the three ideas buckets (high growth, high yield, and compounders) is low, making for a less volatile portfolio. The fund tends to be structurally underweight internet and media, so won’t do as well when these sectors are driving markets.