Over the first half of 2016 JPMorgan American underperformed its benchmark, returning 10.4% against 14.3% for the US equity market. Moreover, almost all of that return came from a fall in sterling relative to the US dollar. The interim dividend has been increased to 2.25p.
The Board says “Garrett’s portfolio is made up of companies which offer relatively good value in terms particularly of price to free cash flow, but also on other “value” characteristics. Historically, these characteristics have generally led to outperformance. Towards the end of last year, markets favoured very highly rated companies, such as Amazon and Facebook. In the first few months of 2016, preferences changed rather speedily to those stocks which had high dividend yields and low volatility (i.e. rather like bonds). In these circumstances, the companies with the characteristics Garrett prefers have not performed so well. This recent underperformance leads them currently to look particularly reasonable value and the portfolio, taken as a whole, offers estimated earnings growth higher than that of the market as a whole, and its price/free cash flow and price/earnings ratio is estimated to be lower than the market as a whole. The sorts of characteristics which Garrett prefers are at extreme levels of unfashionableness.”
Garrett Fish, the manager, said “In general terms, sector selection marginally added value while stock selection detracted from performance for the six month period under review. Specifically, the portfolio benefitted from strong stock selection in the consumer staples sector. Within that sector, our overweight positions in both Tyson Foods and Wal-Mart Stores added value. Tyson Food reported very strong first quarter earnings including record earnings, record operating income, record margins and record cash flows. Besides the strong results and positive outlook for 2016, the company raised fiscal earnings guidance. Tyson Foods expects a rising domestic protein production and moderate export growth. Furthermore the raw material costs are expected to be lower due to continuous investments in innovation and new product launches. Wal-Mart was also able to deliver earnings numbers that were above consensus estimates. The retailer grew revenue year-on-year as well as earnings per share and same store sales.
On a stock specific basis, UGI and Northrop were the top contributors to relative performance. UGI, a distributor of natural gas products, benefitted from the growing demand for its products. It has managed to increase its margins even though the price of natural gas liquids has risen in the year to date period. Industrials concern Northrop, saw its share price rise after the company reported better than expected quarterly earnings which were driven by better revenue, margins and lower corporate costs. The company’s order book grew as they won a significant contract earlier this year. Investors have been looking for potential growth in the defence industry and paying up for it as the defence budget expenditures have been greater than expected.
In contrast, our stock picking in the energy, financials and health care sectors detracted the most from our relative performance. The energy sector was the largest detractor as the rebound in oil prices resulted in our chosen stocks lagging their benchmark peer group. Additionally, some stock specific issues at Marathon Petroleum and Valero Energy weighed on our performance in this sector. Marathon Petroleum’s share price came under pressure as its earnings were overshadowed by news that its newly formed midstream business, a combination of Markwest and MPLX, will cut its distribution in half for 2016 with no guidance provided beyond the current year. Early in the review period Valero Energy’s stock price fell due to a decline in oil prices. Investors have become increasingly concerned with the costs and regulatory risk associated with ethanol blending. Unlike some of its peers, Valero does not produce its own ethanol and is therefore more exposed to these concerns. Later during the period the company reported earnings for the first quarter which missed consensus earnings estimates.
Financials were the worst performing sector in the S&P 500 for the period as fears of a US recession as well as concerns about credit losses from the energy sector caused investment sentiment to turn negative. Within the sector, our overweight positions in Citigroup and Voya Financial were the largest detractors from relative performance. Better than expected earnings from Citigroup were not enough to overcome investor concerns. While the stock is very cheap, trading at levels significantly below book value, the perception of a weak global economy, interest rates that are stuck at historically low levels, as well as a tough US regulatory environment have all caused the stock to underperform in 2016. With regards to Voya Financial, the company reported first quarter earnings that were weaker than expected. Operating earnings and revenue numbers were negatively impacted by the volatility in equity markets.
Within health care, an overweight position in Gilead Sciences hurt relative performance. The company’s first quarter 2016 earnings report indicated that they were facing pricing pressure in their US Hepatitis C business. The company increased discounting in order to broaden drug access to earlier-stage patients and increase overall volumes. While these efforts will likely increase patient volumes, we do recognise the broader pricing pressures in the Hepatitis C market.”
JAM : Markets unhelpful for JPMorgan American