The trusts and funds to seek out if the US economy starts to shine
NEXT WEEK’S US Presidential election will focus attention on the world’s largest economy. Despite Covid- 19, the US remains the driver of long- term global growth.
There is much positive news. Earnings recovery is stronger than expected, housing market trends are upward with demand from millennials for first properties, and manufacturing is picking up.
However, mega- cap technology stocks are driving stock market performance. “The risk is that these companies are now in bubble territory,” warns Darius McDermott of Chelsea Financial Services, adding, “The US is currently a market of a few stocks, not a stock market.”
The revised IMF forecast is for a 4.3 per cent economic fall this year but 3.1 per cent rise next. For comparison, it predicts - 9.7 per cent for the UK but 5.9 per cent increase in 2021.
Before buying into the US, McDermott says to check how much large tech exposure is already held through global funds. Scottish Mortgage, for example, has a high proportion. He selects a trio without such assets: LS Miton US Opportunities, Lazard US Equity Concentrated and Artemis US Smaller Companies.
The Miton fund is also tipped by Teodor Dilov, of Interactive Investor. It aims to find businesses that are resilient to competition and technology change. It seeks firms with highly recurring revenues or customers with frequent small purchases, limited need for finance to support growth and high barriers to entry.
Adrian Lowcock, Chartered Wealth Manager at Willis Owen, says a massive stimulus programme worth around $ 2 trillion is likely to be approved. “Expect the US economy to roar back as it has so often done to the surprise of investors.”
Donald Trump has already cut corporation tax from 35 per cent to 21 per cent and is keen to reduce regulation across industry, notably in financial services, motor and agriculture.
One broker expects that if there is a Democrat win, Biden is likely to invest heavily in infrastructure, notably in renewable energy. He wants to spend $ 5 trillion over the next decade to ensure the US becomes a 100 per cent clean energy economy by 2050. Electric car demand would raise prices for such metals as aluminium, copper and nickel. The cheapest way to invest is through an index tracker. Avoid a small concentrated one like the Dow Jones Industrial Average which has just 30 constituents. Check also the fee charged, currency and tracker error.
Vanguard offers several, including its US Equity Index which tracks S& P’s ‘ total market’ index, ensuring a small stake in 3,435 companies and therefore exposure to small and even micro- cap firms. It is UK domiciled and has both income and accumulation forms. The fund distributes income annually and its ongoing charge is only 0.1 per cent, making it a really inexpensive route to the whole US equity market.
With volatility, there has been ample scope to gain profits. This year alone the S& P 500 has oscillated between 2237- 3580 and Dow Jones from 18,591 to 29,501.
Yet fund managers find the US market notoriously difficult to outperform passive trackers. “It is often one of the most prolific breeding grounds for dog funds,” says Jason Hollands, of Bestinvest, which regularly reveals under and over achievers. It has found 16 dogs out of 74 funds, led by Legg Mason IF ClearBridge, US Equity, Fidelity American Special Situations and M& G North American Value.
The absence or underweight position in technology is why most of these funds underscored. They missed out on stellar returns from Amazon, Alphabet, Apple, Facebook and Microsoft, all of which trade at premium valuations. Whilst some ( Amazon, Alphabet, Facebook) have never paid a dividend, the mega five stocks account for over half the growth in value of the US equity market since the end of 2018 and now collectively represent almost a quarter of the S& P 500 Index.
Bestinvest’s ‘ pedigree’ tips are
Morgan Stanley US Advantage and Natixis Loomis Sayles US Equity Leaders, up 63 and 23 per cent respectively over three years. Whichever Presidential candidate succeeds next week is likely to contend with the issue of technology. Last week Google finally received the long- awaited anti- trust suit from the US Department of Justice.
Martin Payne, of Brewin Dolphin, in Leeds, notes says that “Biden’s stance on the technology sector is unclear but Democrats in general are more interested in regulating big tech than the Republicans with some
proposals to double the global minimum tax on offshore profits from 10.5 per cent to 21 per cent.”
Baillie Gifford American is one of Payne’s tips. After costs, it aims to outperform the S& P 500 by at least 1.5 per cent over rolling five year periods. It takes positions where there is a high level of speculation and so expect volatility. Currently it is mainly in consumer discretionary and IT. Its annualised return of 37.9 per cent over five years is most impressive.
Artemis US Select is recommended by both Lowcock and Payne. The former says the fund focuses on businesses that perform best during the growth phase of the economy. It aims for long- term capital growth through a portfolio of up to 60 stocks including Norfolk Southern Railway and T- Mobile US. If yield is more important than growth, Lowcock and Payne again have the same suggestion
with JP Morgan US Equity Income. It targets quality large and mid- cap stocks with strong brands and good cash flow generation that trade below their intrinsic value. The manager seeks high levels of dividend cover, notably in the financial and health sectors.
Heptagon Yacktman US Equity is an alternative value- focused fund which seeks good rates of return. It is tipped by Scottish Widows Schroder Personal Wealth.
Biotechnology of one of the few sectors to significantly outperform the overall US market, up 18.7 per cent more than the S& P 500 in one year. Ben Staniforth, from Redmayne Bentley, likes Polar Capital Biotech ( 62.4 per cent in North America) and Frostrow Biotech Growth Trust ( 76.8 per cent in US), up 16.3 and 17.5 per cent respectively on an annualised five year basis. If looking specifically for an investment trust, three stand out. Analysis over five years by Morningstar specially for The Yorkshire Post shows the annualised rate: - JP Morgan American ( founded 1881), up 17 per cent; JP Morgan US Smaller Companies ( launched 1982), up 12.2 per cent; Jupiter US Smaller Companies ( founded 1993), up 11.3 per cent
Two higher performers tipped by wealth manager J. M. Finn are the Edgewood US Select Growth, which was started as the family office for the Colgate family, and Natixis Loomis US Equity Leaders, which seeks 30- 40 large companies. Each has shown 24.1 and 23.1 per cent annually averaged over five years.
This is my last Personal Finances feature for The Yorkshire Post. May I thank so many readers who have encouraged me over 16 years. I am grateful to have had the opportunity to help those with money problems.
Expect the US economy to roar back as it has so often done to the surprise of investors.