Bubble Wrap Your Equity Portfolio
3 equity solutions that can help cushion the downside
With the stock market near all-time highs, investors and their financial advisors may be re-evaluating their equity portfolios and looking for solutions that may help prepare for inevitable pullbacks in the market.
At this stage in the market cycle, valuations have begun to look somewhat stretched as we enter the ninth year of this bull market. For most investors, the focus is not on volatility, but on the potential for an eventual equity market correction. Even in good years, sizeable intra-year drawdowns are a normal feature of the market. Over the past ten years, intra-year drops have averaged 16.8%, despite positive returns in seven of these years.
Market corrections are normal S&P 500 intra-year declines vs. calendar year returns
To help you navigate today’s uncertain environment, we focus on three equity solutions designed to deliver upside participation with lower volatility, helping investors get invested—and stay invested.
Equity Income Fund: A conservative approach pays dividends
Today’s steady economic backdrop, coupled with increasing corporate profits, is a great environment for a stock picker to identify attractively-valued companies that can grow their business. When investing for the long term, investors may wish to consider stocks with both growth in their underlying business and an above-market dividend yield. Over time, this combination can provide access to both forms of equity return—capital appreciation and dividend income. As always, these considerations may not be suitable for all long-term investors.
The JPMorgan Equity Income Fund targets high-quality U.S. companies with attractive valuations and healthy dividends, with the aim of providing lower volatility access to stock market growth. Our focus on identifying stocks with a modest payout ratio is a key part of our investment process, as these companies retain enough capital after paying dividends to invest for future growth.
This approach has served us well as we have seen a return of volatility in the energy and materials sectors. In the energy sector, companies such as Chevron and Occidental Petroleum are among our top ten holdings in August 2017.
Hedged Equity Fund: Hedge the equity market without timing it
In the face of a potential market correction, investors may find themselves with a conflicting set of objectives: they are keen to have equity exposure, but want to limit the risk that comes with it; yet at the same time, they are reluctant to swap equity risk for rate risk by building fixed income into their overall asset allocation. That’s where hedged equity strategies come in.
Hedged equity (or options overlay) strategies are designed to deliver higher risk-adjusted returns than broad-based equity indexes, using options to minimize the impact of market disruptions and downturns, rather than to leverage the portfolio.
Our hedged equity strategy delivers a very similar risk profile to a 60% equities/40% fixed income balanced fund, but without incorporating fixed income—and the duration risk that comes with it. By seeking to minimize the ups and downs of the market, hedged equity strategies can help investors stay invested during volatile periods. The introduction of a downside hedge means that investors have less ground to make up when the market declines and, by staying invested, can grow their assets over the long term.
We use our proprietary Dividend Discount Model to rank stocks into quintiles based on normalized earnings. Next, we apply a disciplined index options strategy, hedging the portfolio against risk in adverse markets. Since we are not trying to time the market, we keep this hedge in place 100% of the time, resetting it each quarter. The result is a conservative equity solution that targets a smoother ride for equity investors by giving up some upside potential in exchange for a hedge against falling markets, with roughly half of the volatility and beta of the S&P 500 Index.
JPMorgan Diversified Return U.S. Equity ETF: Seeking a smoother ride in U.S. equity markets
Built on decades of proven experience, proprietary research and insights, J.P. Morgan’s suite of equity ETFs tracks a disciplined, two-part index methodology that aims for lower volatility and better risk- adjusted returns than passive market cap-weighted ETFs.
- Disciplined portfolio construction: Market cap-weighted indices are generally more exposed to sectors that have performed well in the past, not necessarily those likely to perform well in the future. Our methodology takes a more intelligent approach—more evenly distributing risk, across sectors and regions.
- Multi-factor security screening: By identifying and strategically combining the historical drivers of outperformance, we then use a bottom-up stock filter to screen stocks based on up to four criteria, including value, momentum, size and volatility.
The key to this “multi-factor” approach is to maximize the diversification—and, as a result, more effectively allocate sources of risk—between factors.
Looking for a smoother ride in the U.S. equity market?
With equity valuations becoming stretched and uncertainty abounding, a market correction may not be that far off. It’s therefore crucial now—more than ever—to make sure you’re positioned to take advantage of the opportunities arising in the market, while navigate through this inevitable volatility.
Learn more here about these three equity solutions which may help cushion investors’ portfolios on the downside and provide a smoother ride in the U.S. equity market.
The following risks could cause the funds to lose money or perform more poorly than other investments. For more complete risk information, see the Fund prospectuses.
Investing involves risk, including possible loss of principal. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost. There is no guarantee the Funds will meet their investment objectives. Diversification may not protect against market loss.
China's Push Toward Excellence Delivers a Global Robotics Investment Opportunity
Written by: Jeremie Capron
China is on a mission to change its reputation from a manufacturer of cheap, mass-produced goods to a world leader in high quality manufacturing. If that surprises you, you’re not the only one.
For decades, China has been synonymous with the word cheap. But times are changing, and much of that change is reliant on the adoption of robotics, automation, and artificial intelligence, or RAAI (pronounced “ray”). For investors, this shift is driving a major opportunity to capture growth and returns rooted in China’s rapidly increasing demand for RAAI technologies.
You may have heard of ‘Made in China 2025,’ the strategy announced in 2015 by the central government aimed at remaking its industrial sector into a global leader in high-technology products and advanced manufacturing techniques. Unlike some public relations announcements, this one is much more than just a marketing tagline. Heavily subsidized by the Chinese government, the program is focused on generating major investments in automated manufacturing processes, also referred to as Industry 4.0 technologies, in an effort to drive a massive transformation across every sector of manufacturing. The program aims to overhaul the infrastructure of China’s manufacturing industry by not only driving down costs, but also—and perhaps most importantly—by improving the quality of everything it manufactures, from textiles to automobiles to electronic components.
Already, China has become what is arguably the most exciting robotics market in the world. The numbers speak for themselves. In 2016 alone, more than 87,000 robots were sold in the country, representing a year-over-year increase of 27%, according to the International Federation of Robotics. Last month’s World Robot Conference 2017 in Beijing brought together nearly 300 artificial intelligence (AI) specialists and representatives of over 150 robotics enterprises, making it one of the world’s largest robotics-focused conference in the world to date. That’s quite a transition for a country that wasn’t even on the map in the area of robotics only a decade ago.
As impressive as that may be, what’s even more exciting for anyone with an eye on the robotics industry is the fact that this growth represents only a tiny fraction of the potential for robotics penetration across China’s manufacturing facilities—and for investors in the companies that are delivering or are poised to deliver on the promise of RAAI-driven manufacturing advancements.
Despite its commitment to leverage the power of robotics, automation and AI to meet its aggressive ‘Made in China 2025’ goals, at the moment China has only 1 robot in place for every 250 manufacturing workers. Compare that to countries like Germany and Japan, where manufacturers utilize an average of one robot for every 30 human workers. Even if China were simply trying to catch up to other countries’ use of robotics, those numbers would signal immense near-term growth. But China is on a mission to do much more than achieve the status quo. The result? According to a recent report by the International Federation of Robotics (IFR), in 2019 as much as 40% of the worldwide market volume of industrial robots could be sold in China alone.
To understand how the country can support such grand growth, just take a look at where and why robotics is being applied today. While the automotive sector has historically been the largest buyer of robots, China’s strategy reaches far and wide to include a wide variety of future-oriented manufacturing processes and industries.
Electronics is a key example. In fact, the electrical and electronics industry surpassed the automotive industry as the top buyer of robotics in 2016, with sales up 75% to almost 30,000 units. Assemblers such as Foxconn rely on thousands of workers to assemble today’s new iPhones. Until recently, the assembly of these highly delicate components required a level of human dexterity that robots simply could not match, as well as human vision to help ensure accuracy and quality. But recent advancements in robotics are changing all that. Industrial robots already have the ability to handle many of the miniature components in today’s smart phones. Very soon, these robots are expected to have the skills to bolster the human workforce, significantly increasing manufacturing capacity. Newer, more dexterous industrial robots are expected to significantly reduce human error during the assembly process of even the most fragile components, including the recently announced OLED (organic light-emitting diode) screens that Samsung and Apple introduced on their latest mobile devices including the iPhone X. Advancements in computer vision are transforming how critical quality checks are performed on these and many other electronic devices. All of these innovations are coming together at just the right time for a country that is striving to create the world’s most advanced manufacturing climate.
Clearly, China’s trajectory in the area of RAAI is in hyper drive. For investors who are seeking a tool to leverage this opportunity in an intelligent and perhaps unexpected way, the ROBO Global Robotics & Automation Index may help. The ROBO Index already offers a vast exposure to China’s potential growth due to the depth and breadth of the robotics and automation supply chain. As China continues to improve its manufacturing processes to meet its 2025 initiative, every supplier across China’s far-reaching supply chains will benefit. Wherever they are located, suppliers of RAAI-related components—reduction gears, sensors, linear motion systems, controllers, and so much more—are bracing for spikes in demand as China pushes to turn its dream into a reality.
Today, around 13% of the revenues generated by the ROBO Global Index members are driven by China’s investments in robotics and automation. Tomorrow? It’s hard to say. But one thing is for certain: China’s commitment to improving the quality and cost-efficiency of its manufacturing facilities is showing no signs of slowing down—and its reliance on robotics, automation, and artificial intelligence is vital to its success.
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