28th November 2012 by The Harried House Hunter
A week after the US elections, four US fund managers got together to talk markets, economy and the fiscal cliff at a conference organised by Events Hub conference.
Justin Webb, presenter of the BBC Radio Four Today programme, was the guest speaker and he gave a fascinating view on US presidents. In the past I had often ridiculed George W’s gaffs whilst being troubled that such a person could possibly be in control of the world’s largest economy, and I had been equally worried about Romney. So while it was reassuring I wasn’t alone in these thoughts, Webb did offer some insights into how both these men were actually more ‘human’ in their personal contact with people than Obama, and how that had actually served him very badly in his first term.
He also said he thought politicians aren’t getting their messages across to the public – the media and public speakers worked with so many soundbites that the full message was often lost or misunderstood. I tweeted his comments. He concluded by discussing the long-term changes to political relationships around the world that may come about if the US does indeed succeed in becoming ‘energy independent’.
The latter led nicely to the first fund manager presentation from Rebecca Young of Neptune. Rebecca runs the US Income fund and so is focused on dividends. It’s pretty well known that the US market is more diversified than the UK when it comes to dividends, but I hadn’t realized that no fewer than 400 companies in the S&P 500 are now paying one. With all the cash sitting on balance sheets, Rebecca thinks the outlook for dividend payments is good.
George Saffaye, manager of the BNY Mellon US Large Cap Growth, spoke next. He’s American and expects a compromise to be reached regarding the fiscal cliff. He was pretty positive on the outlook for the US, citing improving consumer sentiment, high frequency loans picking up, a firming housing market and the amount of cash on balance sheets. As a growth manager he wants the cash spent on reinvestment or acquisitions though. Like Justin, George believes the shale gas revolution is a game changer.
US consumption is second only to Brazil in terms of its impact on the economy, according to UBS’ Kevin Baker . This is why, in Kevin’s view, the US won’t fall off the fiscal cliff. A 4% fall in GDP would also mean 3.4 million extra unemployed. Politicians simply can’t let that happen. Kevin also talked about technology: far from there being a bubble, as has been mooted in the press, he said the sector has rarely been so cheap.
Fiona Harris from JP Morgan wrapped proceedings up, neatly dodging all the topics already covered by other speakers. She pointed out that Obama has actually been the best President for US markets as they are up 70% since he took office – albeit from a very low point as markets were on their knees at the time. While Rebecca wants company cash to be spent on dividends and George wants it reinvested, Fiona simply wants both. She said that if a company fails to reinvest, eventually dividends stop.
The one question I really wanted answering: “What effect would an increase in dividend tax have if it is not averted as part of the fiscal cliff?” was addressed by Rebecca and Fiona. According to Rebecca, it is possible that this rate could rise, from 15% today, to as much as 47.5%. But she expects a compromise of just 25% and probably just for higher earners. Fiona added that the US and the UK has a tax treaty which means, no matter what happens, UK investors will still only pay 15%. It was also reassuring to hear that there is little historical evidence that the rate of tax on dividends affects the performance of shares. Even when the tax was as high as 70% in the 1970s and 50% in the 1980s, dividend-paying stocks still outperformed the wider market.
I enjoy events like this. Good speakers, enthusiastic about their markets, always capture my imagination. But right at the end my bubble burst. Performance figures showed that only a handful of funds had beaten the index over three years – and then by a paltry amount. I knew it was hard to outperform in US equities, but I hadn’t realised quite how hard. Julian Marr, editorial director of Events-Hub picked up on exactly the same point: the managers admitted the last three years have been extremely difficult.
It seemed such a lot of hard work for very little gain that I went back to the office to run the numbers. And indeed, over one year just seven funds out of a total of 68 have beaten the S&P 500. Over three years, 16 out of 63 have succeeded. It’s not until you look over 5 and 10 years that active management really starts to look good, with 27/40 outperforming over the longest period.
So, for long-term US equity investors, active management is still an attractive option (#phew). And, if the last three years have been especially difficult, contrarians out there may also be persuaded to go with a human fund manager than a passive box of tricks.