Play a trump card and seek out financial rewards in the States
AS AMERICANS celebrate Independence Day next Tuesday, investors worldwide have cause to seek its financial fruits. Its listed companies represent over half of all global equity markets.
For a diversified portfolio, the world’s largest and most innovative economy must have a place. The US is home to so many key brands. From Coca-Cola, McDonald’s and Walt Disney to Apple, Pfizer and Visa, the names are globally familiar and in demand. The US is also the dominant player in such growth industries as technology and biotechnology.
The US possesses clear and exacting accounting standards and generally offers high standards of corporate governance. Potential investors can easily gain information from well maintained company websites.
“The American economy is clearly the healthiest, showing strong signs of recovery since the global financial crisis in 2008,” says Joel Dungate, investment analyst at broker RedmayneBentley.
Unemployment is at a 16-year low of 4.3 per cent as demand continues to pick up. The US is the first economy to start tightening its monetary policy, which is a sign of confidence by the US central bank. Last month the US Federal Reserve increased interest rates for the second time this year.
The new 1.25 per cent rate may not be the last as inflation fell from 2.2 to 1.9 per cent. By comparison, inflation here is 3.1 per cent (RPI), 1.4 per cent in the eurozone and close to zero in Japan.
“US markets have been buoyant and even seem to be boosted by the low regulation and high-spend promises of Donald Trump,” says Dungate, who adds UK investors need to have exposure to the dollar as it strengthens against sterling.
Most of the strength in equity markets has come from the technology sector with very strong returns from Amazon, Apple, Facebook, Google and Microsoft.
Martin Payne, Leeds director of wealth manager Brewin Dolphin, says these five stocks have been responsible for 40 per cent of S&P Index’s return this year. The same five have increased in value by $600bn in 2017, which is equivalent to the combined GDP of Hong Kong and South Africa.
If buying directly, to benefit from paying a reduced rate of withholding tax from 30 to 15 per cent, ensure your broker assists with completing key form W-8BEN. The alternatives are to buy funds which might be either an index which seeks to replicate a published list of companies or one where a professional manager picks stocks.
The former is the cheapest route on charges and might be a tracker fund or an exchange traded fund (ETF).
Leading examples are Fidelity, HSBC, Legal & General and Vanguard. BlackRock also provides a US tracker and owns iShares which offer ETFs that cover US equities.
Before taking the index route, check for tracking error, charges and crucially if the investments are physical or ‘synthetic’, meaning that derivatives and other financial instruments take the place of stock holding which can raise risks significantly.
The only way to outperform the market, apart from direct company purchases, is to opt for an active fund. Dungate tips three investment trusts: JP Morgan American (with notable exposure to the technology sector), BlackRock North American Income (going mainly for large companies particularly in the financial sector) and North American Income (relaunched in 2012 after being a tracker).
Looking at 10-year growth among investment trusts, there have been some distinct successes. According to Morningstar research for the AIC, the stars are:
JP Morgan American, up 208.6 per cent
JP Morgan US Smaller Companies, up 200.6 per cent
Jupiter US Smaller Companies, up 160 per cent
North American Income, up 143 per cent
North American Smaller Companies, up 111.9 per cent.
Despite the currency turbulence created by the property magnate at 1600 Pennsylvania Avenue, many forecasters are attracted to Trump’s promise of a “massive tax cut” and proposed infrastructure spending even though it could mean extra debt of $4.6 trillion, according to Oxford Economics.
Payne cautions against too much exposure in the short term particularly in trackers “where the concentration risk remains high”. Instead he favours a more diversified approach should the technology sector suddenly fall out of favour.
Jason Hollands of Tilney, who advises Saga clients, is currently nervous on the US after it has enjoyed years of monetary support in low interest rates and money printing. When combined with expectations from the President, share prices have risen more rapidly than justified by company profits.
“On most measures, the US stock market now looks expensive,” warns Garry Ibison, chartered financial planner at adviser Chase de Vere, adding that, whilst periods of volatility can be expected, the US “should continue to perform well over the longer term”.
With so much analysis, finding lesser known firms with real growth is a challenge. The number of listed companies has halved in 20 years, driven by consolidation and savings.
Artemis US Select, which is overweight in consumer discretionary, healthcare and IT, is tipped by Payne, along with JP Morgan US Equity Income, which has been providing strong capital returns since launch in 2009. He also favours Jupiter US Smaller Companies which trades at a discount and has no borrowing and – for large cap – JP Morgan American.
Ibison suggests three funds: HSBC American Index as a low cost passive tracker of the S&P 500, Schroder US Mid Cap with an experienced fund manager who achieves strong riskadjusted returns, and JP Morgan US Equity Income with a focus on quality, then valuation and finally dividend.
Darius McDermott, of Chelsea Financial Services, is “quite negative on the US at the moment”, citing an expensive market and not strong company earnings.
He likes Brown Advisory US Flexible Equity and Legg Mason ClearBridge US Aggressive Growth, both based in Baltimore. The former seeks undervalued medium to large businesses and the latter larger companies. For smaller firms, McDermott likes Hermes US SMID Equity which is managed in London.
Hollands favours a factorbased ETF which does not weigh companies on size like a tracker but on such fundamental aspects as revenue, cash flow, dividends and net assets, thereby providing a more defensive, value-based approach.
He tips PowerShares FTSE US 1000 which provides exposure to the 1,000 largest firms.
For active management, he likes a “very selective and unconstrained approach” like Loomis Sayles US Equity Leaders fund. It has just 34 holdings.
To gain greater exposure to the US economy, Hollands opts for T Rowe Price US Smaller Companies Equity, which has jumped 148 per cent in five years.
Finally, Mike Willans, head of International Equities and manager of Canada Life’s Canliffe North American fund, predicts a “slightly choppier” market ahead and has gone underweight on financial and industrial in place of consumer staples and telecommunications.