12th February 2014
What are the reasons for investing in North America? Can active fund managers add value. Investment journalist Cherry Reynard considers the issues.
The US has the broadest and deepest stock markets in the world. It is home to some of the world’s most powerful and admired companies, and features that sectors that are simply unavailable or uninvestable in other parts of the world. Nevertheless, this comes with its downside: US markets tend to very efficient and therefore relatively difficult for active managers to beat. Funds within this sector will usually incorporate US and Canada-listed stocks, with managers based in the UK or US. Funds will be listed in the IMA North America, or North American Smaller Companies sector.
What are the range of fund strategies within sector?
The US has been a tough sector in which to be an active fund manager and relatively few have beaten the index consistently. Many multi- and discretionary fund managers have chose to use an index fund for their main large cap exposure in the US.
However, some managers have added value shrewd stock-picking, particularly by taking exposure to smaller and mid cap stocks.
Groups such as Baillie Gifford and Fidelity along with boutique specialists such as Findlay Park have dominated the sector.
US funds tend to have a greater style bias than elsewhere. There are those that focus on growth, seeking out high quality businesses that can grow their earnings and cashflow. Many of the fund with a smaller companies bias will take this approach.
These funds tend to do very well at times of market expansion but may struggle at times of economic and stock market weakness.
There are also ‘value’ driven funds, such as those offered by Legg Mason and M&G. These are looking for companies trading on low multiples where there is the scope for recovery.
North American companies have some of the most enduring and consistent dividend paying companies in the globe. Colgate Palmolive, for example, has a dividend history going back to 1895. As a result, North America has been a fertile sector in which to launch income-focused funds. Groups such as JPMorgan Asset Management and Jupiter have launched this type of fund in recent years with considerable success.
It is also worth bearing in mind that North American companies are likely to form the lion’s share of global equity funds. US companies still form 55% of the MSCI World index and as such are generally well-represented in global funds. Investors wanting less US equity exposure should examine the existing weight in US markets.
What has recent performance been like?
Over the past five years, the average fund in the North American sector has grown by 96% and in the North American Smaller Companies sector by 133.5% (to 3rd February). This compares to average growth from the UK Equity Income sector of 105.8%, and from the Global sector of 78.1%. Both North American sectors saw very strong performance in 2013: economic recovery took hold faster in North America and its stock markets recovered more quickly. North American stock markets trade on higher multiples than elsewhere in the world because companies tend to have higher growth rates, and the economy is perceived to be more shareholder-friendly.
The best funds in the sector have no obvious bias beyond a focus on stock-picking. Value and growth styles appear in the top 10 funds over five years. The Legg Mason ClearBridge US Aggressive Growth and the GAM Star Gamco US Equity funds are both concentrated ‘best ideas’ style funds. It may be coincidental, but the top managers have tended to be based in the US.
Nevertheless, it is worth bearing in mind that the US markets have performed exceptionally well in recent years, and those managers that do well in an environment of rising equity markets may not be those that do well in falling markets.
When does the US sector perform well/badly?
Just as the US economy usually leads the global economy out of recession, US stock markets tend to rise ahead of other global stock markets. This means that investors tend to do best in US equities just as the global economy is starting to turn. They may also do well in US equities during times of market weakness, when US companies are seen as more robust and the US economy more flexible. The worst time, relatively, for US equities tends to be at the peak of economic expansion, when other, higher risk markets such as emerging markets tend to do better.
What sort of investor does it suit?
The US is the largest global economy and, by capitalisation, makes up around 55% of world stockmarkets. In some sectors – such as the technology or biotechnology sectors – investors cannot access companies anywhere else in the world with the level of sophistication and maturity of those found in the US. Equally, the US is the birthplace of significant technical innovation. Investors with little or no exposure to US markets risk missing out on the next Apple or Facebook.
Top 10 by performance (5 year)
Legg Mason Capital Management Opportunity
Legg Mason ClearBridge US Aggressive Growth
GAM Star Gamco US Equity
Janus US Research
Melchior North American Opportunities
UBS US Growth
M&G North American Value
JPM America Equity
Legg Mason ClearBridge US Large Cap Growth
Franklin US Opportunities
Questions for investors to ask about the sector
Is the fund hedged back into sterling?
Is the manager based in the US?
Is it run with a value or growth style?
How similar is it to the index and might you simply be better off in a tracker fund?
James Calder, head of research, City Asset Management,
“We believe the US markets may have a little further to go. The main things will be earnings, but if they don’t come through in the US, they won’t come through anywhere else. We continue to be pleasantly surprised by the strength of GDP growth figures.”
Calder’s favoured funds
CF Miton US Opportunities
Aviva US Equity Income
Darius McDermott, managing director, Chelsea Financial Services
“The US has good growth but current stock market valuations require companies to sustain strong earnings growth. Nevertheless, we think the market will stay strong this year.
McDermott’s favoured funds
Framlington American Growth
Miton US Opportunities