This extraordinary election has had us all glued to our screens and digital newspapers, but behind the noise and rhetoric, investors should be considering what investment opportunities exist in what is still the world’s largest economy. We have taken a look.
The U.S. stock market as illustrated by the most widely followed index the S&P 500 is up +4.28% year-to-date, and by +1.82% over one year, but behind this headline figure, some individual sectors have performed much better than others, and within the poorly performing sectors, North American investment trust managers have identified opportunities where they think the market, as it often does, has gone too far, and as result, share prices are too cheap.
The attraction of the United States is obvious, it is one of the largest manufacturing countries in the world, and a leader in technological and scientific advances. The North American investment trust sector however, is decidedly puny, with only one large generalist trust – the J.P. Morgan American, two income focused trusts, and one private equity style trust, whilst in the smaller companies sector there are three options. Outwith the dedicated North American sector however, there are a large number of trusts with a varying level of exposure to U.S. equities.
The reason the sector is so small, is probably connected to the difficulty managers experience in beating the U.S. stock market, which is considered by many investors to be the most efficient market there is, and difficult to beat as a result. This means that a lot of investors prefer low cost passive strategies as employed by ETF’s and tracker funds, to actively managed investment trusts and open-ended funds.
Sectors offering opportunities
The Healthcare sector has taken a battering in the U.S. during this long election cycle, as politicians from both left and right, but especially the left, and emboldened by the Bernie Sanders campaign for the Democratic party candidacy, with its focus on the small number of drug companies who have exorbitantly increased the price of drugs by several hundred per cent or more, for no apparent reason other than they could get with it.
The sector is trading at a P/E (price over earnings, which is a method of valuing a stock by the underlying earnings per share, as a percentage of the share price), which is lower than the P/E of the S&P 500, which history tells us is a good time to buy the sector. That is not to say that it won’t go lower, but, it is very difficult to buy at the bottom because how do know you’re there yet? But if held for the long term, history, whilst no guarantee, indicates a profitable long term journey.
Garrett Fish, Manager, JPMorgan American Investment Trust remains positive and overweight on Healthcare, despite it being “part and parcel of the presidential candidates’ election rhetoric with no shortage of finger-pointing”. He has made a new investment and increased exposure to a number of existing holdings on valuation grounds. He said: “it’s an area of the market where we remain positive and overweight. Over the past two months we have initiated a new position in McKesson and increased our holdings in Humana, Baxter International and Aetna to capitalize on attractive valuations”.
Robert Siddles, Manager, Jupiter US Smaller Companies, says that spiralling healthcare costs, perhaps America’s greatest challenge, has led the company to focus on low cost service providers, such as home care and IT companies that can help reduce costs.
Don San Jose, Manager, JPMorgan US Smaller Companies Investment Trust has added 13 new names to the portfolio since the start of this year, with previously researched names returning to his radar (on valuation grounds) as they’ve been cast aside as a result of the volatility brought about by a variety of issues, including the election campaign.
Percentage Share price total return on £100 to 30 September 2016
Duration
1yr
3yrs
5yrs
10yrs
Weighted Average
Average investment trust ex VCTs
17%
33.5%
82%
112%
Weighted Average
North America
34%
44%
95%
128%
Weighted Average
North American Smaller Companies
24%
46%
132%
162%
BlackRock North American Income
North America
45%
47.5%
N/A
N/A
Gabelli Value Plus+
North America
22%
N/A
N/A
N/A
JPMorgan American
North America
31%
58%
124.5%
199%
Middlefield Canadian Income Trusts
North America
36%
7.5%
37%
76%
North American Income
North America
48%
45%
118%
137%
JPMorgan US Smaller Companies
North American Smaller Companies
24%
44%
175%
177%
Jupiter US Smaller Companies
North American Smaller Companies
32%
14%
96%
168%
Source: The AIC.
Fran Radano, Senior Investment Manager at Aberdeen’s North American Income Trust, points out that, “the ultimate winner will unlikely have a mandate to push their platform through unilaterally, and as long-term investors there’s a better chance that this is simply ‘much ado about nothing’.” He takes comfort in the company’s “thoughtful balance of industry leading enduring global franchises married with a diversified group of cash generative growth companies.”
Robert Siddles, Manager, Jupiter US Smaller Companies said: “Politics makes little difference to US equities (Reagan being an honourable exception). America is about freedom to get on with business: government of business, by business and for business. The trust’s objective is long-term capital growth but alongside this when managing the trust, I try to avoid losing money, so the focus is on exploiting market dislocations rather than forecasting uncertain events. Recent worries about political ad spending created an opportunity in radio and TV broadcasters, where favourable changes to retransmission fees make the business less cyclical.
“Spiralling healthcare costs are perhaps America’s greatest challenge in coming decades. The trust is focusing on low cost service providers, such as home care and IT companies that can help reduce costs. Historically equity returns tend to be higher with a Democratic President, probably because of increased government spending. A hidden risk this time comes from the length of the current economic expansion (now into its eighth year) and the new President’s priorities. The top priority is to get re-elected in 2020, so getting a recession over with sooner rather than later is the key: higher oil prices may be the catalyst.”
Generalist trusts take on America
The AIC Global and Global Equity Income sectors have an average of 36% and 22% exposure to North America respectively, ranging from the very high 59% at Martin Currie Global Portfolio, to a low of only 9% at Seneca Global Income & Growth (see chart).
Tom Walker, the Manager of Martin Currie Global Portfolio Trust, who has 59%, and is a long term manager in the sector having previously managed a dedicated U.S. fund, said: “The US economy has probably the best growth outlook of developed countries for the next few years but it is also quite a mature market and highly competitive. Many US companies are among the best quality in their sectors in the world – particularly in the technology sector. However, as stock pickers, for every company we assess, we look at its geographic earnings profile not at its country of quotation”.
Investment Trusts in the Global and Global Equity Income sectors - US exposure
Company
AIC Sector
Country
Exposure (%)
Martin Currie Global Portfolio
Global
USA
59
Securities Trust of Scotland
Global Equity Income
USA
56
Mid Wynd International
Global
USA
49
Scottish Mortgage
Global
USA
48
Alliance Trust
Global
USA
46
Edinburgh Worldwide
Global
USA
45
Monks
Global
USA
45
F&C Global Smaller Companies
Global
USA
41
Foreign & Colonial Investment Trust
Global
USA
38
JPMorgan Elect Managed Growth
Global
USA
35
Henderson International Income
Global Equity Income
USA
34
Invesco Perpetual Select Global Equity Income
Global Equity Income
USA
33
JPMorgan Global Growth & Income
Global Equity Income
USA
31
Brunner
Global
USA
29
Bankers
Global
USA
27
Witan
Global
USA
25
Scottish American
Global Equity Income
USA
25
Caledonia
Global
USA
23
Hansa Trust (Ord)
Global
USA
22
Scottish Investment Trust
Global
USA
22
EP Global Opportunities
Global
USA
16
Blue Planet Investment Trust
Global Equity Income
USA
14
Murray International
Global Equity Income
USA
12
Lindsell Train
Global
USA
10
Law Debenture Corporation
Global
USA
10
Seneca Global Income & Growth
Global Equity Income
USA
9
Source: The AIC.
Mark Whitehead, Manager of Securities Trust of Scotland (56% exposure to US) said: “US companies have been more proactive in the aftermath of the global financial crisis in restructuring their operations than companies in other regions, which has enabled them to invest more in growth. In addition, the macroeconomic conditions in the US look to be improving more than elsewhere as the Federal Reserve appears to have been successful in its stimulus programme which was started earlier and in greater size than by other central banks.”
Alex Illingworth, Co-manager, Mid Wynd International Investment Trust (49% exposure to the US) said: “Mid Wynd has an investment process which seeks to identify areas of structural long-term growth. We run a portfolio that is genuinely global but due to the dynamism and the breadth of the American economy we have tended to find many of our ideas being quoted in New York. To give an example, we try to find companies which access the spending power of the older generation. This demographic is a structural growth area for America, but it isn’t for Japan, where the population has already got old.
“Macro and exogenous events such as the U.S. election we do not take a view on, preferring to focus on the companies that can grow their business regardless of factors outside of their control. All our companies need in order to prosper, is order in Washington. What we would worry about are unpredictable policy changes emanating from DC. As such, a continuation of Obama policies, which Hillary Clinton appears to mostly offer, would be preferable.”
Andrew Bell, Manager, Witan Investment Trust (25% exposure to US) said: “Witan has around a quarter of its shareholders’ assets invested in US equities. This reflects the depth of the market from a stock-picking point of view rather than the heavy weighting of the market in global indices. Aside from its leading position in the technologies which are successfully disrupting the business models of many more mature sectors, the US has a major leadership role to play in global economic and political developments. Cynicism has become an enduring feature of modern democracies but is rarely a good basis for government. It is important that the new President and Congress demonstrate an ability to find common ground in passing sensible laws, rather than perpetuating political gridlock. We believe it is vital that the US remains engaged with its friends as well as its competitors across the world.”
James Henderson, Manager of Law Debenture Corporation, which has only 10% exposure to the US said: “The UK market offers higher dividend yields than other major markets and the dividends from the UK market are expected to grow substantially above inflation over the coming year. This explains why my exposure to the US is relatively low.”