Parsons says the US is likely to continue to lead the world economy towards recovery and that investors should consider raising their exposure to the region. “The US has experienced one of the strongest recoveries among major economies since the financial crisis. GDP has recovered to pre-crisis levels and unemployment is back down to below 7 per cent, following steady levels of job creation. Meanwhile, industrial and manufacturing productivity continues to gather pace and consumer confidence and retail sales have improved.”
“All this was no doubt helped by the unprecedented low levels of interest rates and monetary stimulus.”
The outlook for the US economy has taken a hit recently, however, with first quarter GDP figures indicating the economy shrank 2.9 per cent.
The Fed blamed this on an unusually cold winter hitting economic activity and consumption, although critics point to a greater cyclical decline after a strong recovery from the depths of the financial crisis.
Parsons remains upbeat though. He said: “Many see the Q1 GDP numbers as an aberration due to the unusually bad winter. We expect the Q2 figures to show a resumption of the recovery trajectory as industrial and manufacturing orders which were put off in Q1 begin to be filled again from April onwards.”
“With the recovery looking to be sustainable, the Federal Reserve has begun to scale back its monetary support and the markets seem to be comfortable with the prospect of an increase in interest rates within the next year.”
“Corporates are seeing steady increases in sales and profitability and are still flush with cash. We have already seen increased M&A activity, especially within the healthcare sector, and this is likely to continue as companies seek to increase returns from excess capital.”
Artemis’ Cormac Weldon is also bullish on the prospects for US markets. He recently told FE Trustnet that fears the US was expensive were misguided.
Parsons says getting exposure to the US market has been a hotly debated topic for years.
“Many experts continually stated that it is very difficult to stock pick in a market that is defined as the most efficient in the world and over-researched,” he said.
Mike Deverell, investment manager at Equilibrium, told FE Trustnet he favours passive funds for US exposure such as Vanguard US Equity Index as he can't find an active manager who can consistently outperform the market.
Parsons says he has some sympathy with this view.
“For those that believe this to be the case, then investment would be better suited towards an index tracker or ETF. However, for those who believe an active manager can add value and potentially generate excessive returns, then a managed fund will be the investment of choice,” he said.
Here he tips two active US funds he believes can outperform the index.
Schroder US Mid Cap
Parsons says this £1bn fund, managed by FE Alpha Manager Jenny Jones, has an emphasis on quality companies which means it should perform better than its peers in an uncertain environment.
“Investors should be aware that this fund is likely to outperform in flat, negative or steadily rising markets, however in strong rising markets it is likely to underperform given the emphasis on quality companies and avoidance of momentum opportunities.”
“Jones has over 30 years’ investment experience and nine years at the helm of this fund. The portfolio selection concentrates on companies sized between $1bn and $7bn - an investment universe of approximately 1,200 companies.”
“This universe is then whittled down through an appraisal of the underlying businesses looking for quality of management and business models that demonstrate competitive advantages.”
“Having undertaken both qualitative and quantitative research, the portfolio will typically comprise between 60 and 90 stocks. This is then broken down so around 50 to 60 per cent of the portfolio is in companies Jenny believes offer superior growth, 20 to 30 per cent in those which are deemed to be steady growers and finally 20 to 30 per cent in companies deemed to be turnaround situations.”
“With a management team based in the US, access to the companies the fund invests in is more readily available compared with other US funds managed outside of the country.”
The fund has returned 35.23 per cent over the past three years, compared with an IMA North America sector average of 39.27 per cent.
Performance of funds, sector and benchmark over 3yrs
Source: FE Analytics
The fund has also failed to beat the Vanguard US Equity Index fund over this period, which has returned 45.08 per cent.
AXA Framlington American Growth
This £600m fund has been managed by Stephen Kelly since February 1997.
“The underlying objective of the fund is to achieve capital growth through investment in North American stocks, which may include Canada and Mexico, but with a medium to large cap bias,” Parsons said.
“For a company to be included within the portfolio, it must display above-average profitability, have quality management and good growth potential. Individual holdings are normally limited to a maximum of around 2 per cent and the fund generally holds between 65 and 85 stocks.”
It has returned 34.58 per cent over three years, also less than the sector average and the Vanguard US Equity Index fund.
Performance of funds, sector and benchmark over 3yrs
Source: FE Analytics
The fund's bias to tech has contributed to particularly poor performance this year, with returns of just 0.75 per cent compared with 4.6 per cent from its benchmark. Parsons says this is characteristic of the manager’s style.
“By the very nature of the type of companies and sectors that Stephen invests in, the fund may on occasion suffer periods of underperformance. This has recently been borne out when technology and biotech had a strong sell-off and the performance of the fund was hit.”
“However, the views of Stephen have remained resolute and he believes the opportunities he seeks in these sectors will over the longer term come to fruition.”
