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Wake up to potential of US funds, urges Schooling-Latter

Chelsea Financial's head of research says the shale gas story, housing market recovery and re-shoring of businesses from overseas mean the world’s largest economy could even outpace emerging markets this year.

Joshua Ausden

By Joshua Ausden, News Editor, FE Trustnet
Thursday March 07, 2013

US funds are under-represented in UK investors’ portfolios, according to Chelsea Financial Service’s Juliet Schooling-Latter, who believes they are set to miss out on one of the industry’s most compelling growth stories.

ALT_TAG Schooling-Latter (pictured) says she has recently upped her exposure to US funds in her own investment portfolio, but is seeing a lack of interest from private investors – in spite of the favourable outlook for the region.

"I don’t understand it, I really don’t," she said. "Chelsea investors have less than 3 per cent of their portfolios in US funds, even though it makes up a massive chunk of the global index."

"It’s such a vast economy, but for some reason it gets overlooked."

Schooling-Latter says now is a particularly interesting time to invest in the region.

"There’s an awful lot to be positive about," she continued. "First of all you’ve got the shale gas story, which not only gives US businesses a cost advantage, but also bodes well for infrastructure and job growth and therefore consumer spending."

"The housing market is beginning to take off again, banks are lending and you’ve also got the re-shoring of businesses from emerging markets, which is a really interesting story."

"During times of a weak dollar, emerging markets tend to outperform, and when the dollar is strong, the US tends to outperform. It looks like we’re entering a phase of a stronger dollar, so there’s an obvious appeal there."

The US equity market has been one of the leading lights in the recent equity rally, with the S&P 500 up 16.7 per cent so far this year.

Performance of index and sectors in 2013


Source: FE Analytics

IMA North America and IMA North American Smaller Companies are the second- and third-best performing sectors so far this year, behind only IMA Japanese Smaller Companies.

Schooling-Latter acknowledges that the issue of debt is still important and could act as a drag on any recovery, especially if the US plunges into another recession.

"If they muck about with policy, then obviously this would be a problem for markets," she said.

"However, I’d look at this as more of a buying opportunity than anything else. They seem to have got their act together overall."

Schooling-Latter’s views echo those of a number of fund managers.

FE Alpha Manager David Coombs said earlier this week that the US could be the next significant growth story for investors and could even outpace emerging markets.

"'Emerging America' could be the next big growth story for investors," said Coombs.

"There is growing evidence of something significant happening that could well challenge the West-to-East investment theme that has anchored consensus wisdom over the past 10 years."

"Recent US GDP revisions were a bit poor, but the 'rust tigers' – mid-western and north-eastern states, including Illinois, Ohio and Michigan – have certainly put in some impressive manufacturing gains."

"Politics also appear to be moderating. The fiscal cliff should no longer derail the recovery, although there will be some tightening of fiscal policy," he added.

Coombs believes the US equity market is "fair value", and has increased his exposure to growth-focused portfolios, including the Royce Smaller Companies fund.

Thames River’s Gary Potter is equally positive; he believes a US recovery will push the FTSE to an all-time high this year.

Schooling-Latter rejects the popular argument that investors are better off holding a US tracker rather than a US fund, and says she has recently added AXA Framlington American Growth to her ISA.

"It’s very Alpha-driven and has consistently outperformed – something that is supposedly impossible to do," she said.

"I’m thinking of adding some more US exposure as well."

FE Analytics data shows that on average, US funds have been less effective at adding value than their rivals in other emerging and developed markets.

In the IMA North American sector, the average fund has added 1.55 per cent of Alpha to its benchmark over a five-year period. By contrast, in the UK All Companies sector the figure is 2.56 per cent, and in the IMA Asia Pacific ex Japan sector the figure is 2.01 per cent.

Stephen Kelly’s AXA Framlington American Growth fund has been one of the better funds at adding value to its benchmark, with an Alpha of 2.63 per cent over five years.

This has translated into returns of 74.99 per cent over the period, compared with 56.44 per cent from the IMA North American sector average, which is also the fund’s benchmark.

Performance of fund vs sector over 5yrs


Source: FE Analytics

The fund has also outperformed over three and 10 years, with less volatility, but has fallen short over one.

Gordon Grender’s GAM North American Growth fund is consistently the best fund in terms of Alpha in the sector, with a score of 8.73 per cent over five years.

FE Alpha Manager Grender uses the S&P 500 as his benchmark.

The fund is also one of the best performers on a cumulative basis, boasting top quartile performance in its sector over one, three, five and 10 years.

Both GAM and AXA funds have a total expense ratio (TER) of 1.56 per cent, though the former has a steeper minimum investment, at £6,000.

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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