Investing in the large US companies that have dominated the past decade has been a good strategy and one that the JPMorgan American Investment trust used effectively, returning 367% over 10 years.
With top holdings in the company including big tech names such as Apple (5.6% of all assets), Microsoft (5.1%) and Alphabet (4.5%) the trust soared, but the financial environment that supported these firms over the past 10 years is no longer working as higher interest rates and inflation have stopped the tech boom in its tracks.
This should have led to underperformance for the trust, yet over the past year it is 7.9 percentage points ahead of its peers in the IT North America sector, up 15.7%.
Manager, Jonathan Simon, has increased returns 75.4% since taking over in 2019 and driven the trust 12.4 percentage points ahead of the S&P 500 benchmark over that time.
Here, he tells Trustnet how he hopes the value and growth balance in the £1.4bn portfolio will see it through this period of uncertainty.
Total return of trust since manager took over
Source: FE Analytics
What is your investment process?
This is an actively managed investment trust focused on generating capital growth through the core US stock market.
We take a concentrated approach, centring on a 40 stock allocation split across a value sleeve, that I manage, and a growth sleeve, run by my co-manager Timothy Parton. There is a 60% limit on either style in the portfolio and it’s normal for there to be some level of fluctuation in which one is more predominant.
Our colleague Eytan Shapiro also contributes to the portfolio with a selection of small caps, but this is capped at 10% of the overall portfolio and has averaged about 5% over the past 12 months.
Timothy and I have worked together in the US equity team for 35 years, and whilst our specialities differ, we both focus on quality. We look to own stakes in high-quality businesses with durable competitive advantages, which we believe will perform well over the long term.
What sets your fund apart from its peer group?
By blending both growth and value styles through two separately managed allocations, the trust has been able to withstand many of the ups and downs in US equity markets that we’ve seen over the past three years.
Looking ahead, we anticipate markets will continue in a similar manner, regularly rotating favour between value and growth. We therefore believe our balanced strategy should provide stability if economic fundamentals deteriorate, or uncertainties escalate further.
What have been your best calls over the past year?
The auto parts retailers have enjoyed a good period and our key holding here is automotive replacement parts and accessories retailer and distributor AutoZone. Its share price has rallied more than 40% over the past 12 months through March.
This industry is defensive by nature and enjoys meaningful tailwinds and high barriers to entry and AutoZone is a leading player. Its earnings pattern, which is steadier than its competitors’, is testament to its well-managed, variable cost structure.
The stock rallied throughout the year on the back of strong quarterly results and we anticipate that demand for auto parts will remain high – vehicle usage is returning to pre-pandemic levels and the inevitable transition to electrical vehicles (EVs) is having a twofold impact on demand.
The shortage of semiconductors is delaying the production of EVs, so car owners looking to switch to EVs are being forced to wait, and must therefore keep, and maintain, their current vehicles in the meantime.
Share price of AutoZone over the past year
Source: Google Analytics
What were your worst?
The area in retailing that has suffered recently is the clothing retailers and a disappointing holding for us has been GAP. The stock is down nearly 40% over the past 12 months through March as it has suffered a few missteps, particularly with regards to supply chain disruptions which has weighed on earnings and margins.
We were attracted by the company’s international footprint, ‘omni-channel’ strategy, which combines retail stores with an online retail platform and cross-channel initiatives that seek to integrate customers’ instore and digital interactions, and maximise value.
It has continued to close unprofitable stores to focus on more profitable and higher growth areas of the business like Old Navy and Athleta – it may be fine over the long run, but it’s just not high conviction enough anymore for me to keep it in this portfolio.
Share price of GAP over the past year
Source: Google Finance
What is your most exciting stock in the fund?
My co-portfolio manager tends to have the ‘exciting’ stocks. I look out for the ‘steady eddies’, particularly in riskier market environments like we’re currently in.
As a true value manager, what excites me is attractively valued companies that have a great management team and a strong balance sheet. These qualities should mean the share price will eventually be rerated higher by the market, if you are patient. Right now, Bank of America is an example.
The bank continued to report strong results for the first quarter of 2022, in spite of headwinds. We remain confident in the ability of Bank of America’s management to grow margins through efficiency improvements, and the diversity of its business mix is another reason we like this company.
What do you do outside of fund management?
I enjoy a few hobbies outside of work. I like to play bridge, tennis and golf. I also enjoy hiking when time permits.