With Fed chairwoman Janet Yellen expected to enact both of these policies by 2015, the US's monetary strategy has recently been one of the major talking points in the financial world.
Several leading experts have warned that tighter monetary policy in the US will cause volatility in the equity market as the added stimulus has been the primary driver of the S&P 500’s almost uninterrupted gains over recent years.
Performance of index over 3yrs
Source: FE Analytics
However Cowart (pictured), manager of the $2.9bn Nordea North American All Cap fund, disagrees and is continuing to expose his portfolio to risk.
“We think we are in a long but slow economic cycle,” Cowart said.“It may last for several more years and the cycles don’t end until the Fed ends them. The Fed doesn’t end them until they get worried about inflation and, at the moment, they are still worried about inflation being too low.
“I think we are a good deal of time away before we have to worry about an economic downturn.”
“Growth may not be as rapid as it has been in the past as a lot of the world is still deleveraging, but we want to be cyclically exposed to a lot of different areas.”
Although a number of managers, such as Artemis’ Jacob de Tusch-Lec, have warned that the end of QE will cause asset prices to fall, the Nordea manager says this is a very short-termist view.
“Most people have probably seen the chart which shows the expansion of the Fed’s balance sheet relative to the performance of the S&P 500 over recent years, which shows they are right on top of each other,” Cowart said.
“But we went back with the help of the St Louis Fed, which did a pretty interesting paper on this, to look at the long-term history of QE.”
Cowart says that the Fed first started using QE in 1914 and expanded its balance sheet by five times until the 1930s – a period when stocks rallied, crashed and started to recover.
Then, after the Second World War until the 1990s – a period he says was synonymous with economic growth – the Fed reduced its balance sheet by five-fold.
“People who say the only thing that has the market up is QE need to go back and explain these historical anomalies,” he said.
“Between 1914 and the late-1930s, you had a grand rise in QE and it didn’t stop a stockmarket crash, and in the 40s to the 90s when you had a great decline in the Fed’s balance sheet, it didn’t stop a bull market.”
“There is no reason why the end of QE has got to be the end of a good market.”
Cowart does concede, however, that the stellar gains from the S&P 500 last year were largely due to stocks re-rating as a result of the added stimulus, rather than earnings growth.
Performance of index in 2013
Source: FE Analytics
“Last year was a flattish year for earnings; now we are beginning to see acceleration in earnings. In the second quarter, the S&P’s earnings were up more than 11 per cent and that’s after the penalties and fines that Citigroup paid, which were a couple of billion dollars.”
“We are getting economic acceleration again, not to 4 or 5 per cent, but maybe to 3 per cent and I think corporate earnings are going to benefit from having that.”
In terms of interest rates, Cowart expects the Fed to increase them from their ultra-low levels, but only to 0.5 or 0.75 per cent.
“I do believe that once that happens then we are in for interest rates of maybe less than 1 per cent for another year or two to make sure that all the deflationary impulses around the world are brought under control,” Cowart said.
Due to his bullish outlook, the manager has a high weighting to banks in his Nordea North America All Cap fund, counting three – Capital One Financial, JP Morgan Chase and Citigroup – as top-10 holdings. He says that not only are they attractively valued, but they should benefit from increased economic activity and higher rates.
He is avoiding less-economically sensitive stocks.
“We don’t own some of the electric, telephone utility and traditional defensive companies,” he said.
“These companies are selling at about a 20 per cent premium to the market when typically they sell at a 20 per cent discount. We don’t think there is a valuation argument attached to the defensive, rate-sensitive types of names, simply because the retail investor has bid these things up in their quest for yield.”
“If the bond market does fine, so will these companies, but we think the next move in bond yields is likely to be higher.”
Cowart launched the Nordea North America All Cap fund, which sits in the FCA offshore universe, in May 2012.
The fund has returned 66.15 per cent over this time, beating its Russell 3000 index benchmark in the process.
It would be a top decile performer if it were in the IMA North America sector, as only four portfolios, including Legg Mason Opportunity and Legg Mason Clearbridge US Aggressive Growth, have delivered a higher return.
Performance of fund vs sector and index since May 2012
Source: FE Analytics
The fund, as its names suggests, invests across the US market cap spectrum and can therefore be compared against the once popular, but now closed, $8.8bn Findlay Park American fund. Cowart’s Nordea fund has beaten Findlay Park American since its launch.
Nordea North America All Cap has an ongoing charges figure (OCF) of 1.13 per cent.
