Mark Dampier: Funds should benefit as US looks further ahead
Saturday 21 April 2012
The American sector seems to be a graveyard for fund managers in the UK. Given the size and dynamism of the American economy you might expect a decent number of good-quality funds to invest with.
Yet it is hard to find a manager that has consistently outperformed the market to a significant degree. Indeed, there have been some notable falls from grace. For instance, the Legg Mason US Value Trust, run by Bill Miller, outperformed the S&P 500 each year for more than 15 years, only to lose its entire outperformance in the space of a few years surrounding the credit crunch.
It is rather frustrating because the US is an attractive market at present. We are seeing stronger signs of recovery than in other Western markets. Some of this is probably down to good old entrepreneurial spirit, coupled with the fact that net immigration means the demographics are better.
The US government also enjoys remarkably low borrowing costs given its finances. To my mind, this may mean trouble is being stored up for the future. There has been no real austerity to date, and at some stage after the November presidential election the $15 trillion debt pile will have to be addressed.
However, for now corporate America seems to be in rude health. One manager in the sector I have had my eye on is Aled Smith, who manages the M&G American Fund. Unfortunately he had a fairly poor 2011. Like many others he has struggled to outperform the market through different economic cycles, but in meeting Smith you can't help but be impressed by his enthusiasm and dedication.
The fund is very much about Aled Smith's process and principles. By and large it is built from the bottom up, focusing on individual stocks rather than taking any kind of macroeconomic viewpoint.
Yet since 2007 the economic picture has dominated US and global markets, which hasn't particularly suited the fund. Smith believes the market has been obsessed with short- term factors, preferring what are perceived as reliable, solid companies rather than looking forward three to five years to identify companies that can grow rapidly.
Essentially he is looking to identify tomorrow's "wealth generators", and believes a major opportunity to invest in such businesses has presented itself. He suggests the market today is impatient, demanding instant gratification from good quarterly earnings figures. Companies able to achieve this are being rewarded with higher share prices. But at the same time the market is punishing those whose short-term numbers are disappointing, without appreciating their efforts in investing for the future. According to Smith this has led to a disparity in valuations between the two.
He cites Apple, Wells Fargo and Pfizer as fashionable stocks that have pleased investors, yet he feels better opportunities may lie in companies such as Cisco and Citigroup. In particular he looks for turnaround situations, companies changing their business models leading to better returns for investors. He is especially excited by companies such as GE where investors have been scarred by past mistakes and are underestimating the growth potential. The stock yields nearly 4 per cent, an indication of the value available. He is also a holder of eBay, which has had a prolonged period in the doldrums, and Home Depot, which has undertaken an efficiency drive.
On markets generally, Smith is highly optimistic. He feels they are excellent value, and believes the US is leagues ahead of Europe and Japan when it comes to finding genuine world-leading companies.
Interestingly, he points out that only 17 per cent of active managers in the US outperformed in 2011, the lowest percentage since 1997. It's not exactly a glowing endorsement of active fund management, but it has potentially set up a significant opportunity for active fund managers to outperform if we enter an environment where long-term stock picking returns to the fore. It certainly seems possible that investors might lengthen their investment horizons at some point, something that should benefit Aled Smith's philosophy and his fund.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
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