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Three funds for investors to consider whichever way US markets head

30 June 2017

With the US market performing strongly in recent years, Darius McDermott of Chelsea Financial Services highlights three funds that should weather either a continuing bull market or any downturn.

By Rob Langston,

News editor, FE Trustnet

As US markets continue to deliver steady returns despite some headwinds, investors are beginning to question whether the current bull run has much pace left in it.

Indeed, low levels of volatility have suggested that markets are too complacent about risk in equity markets and current high valuations.

Yet, the US market has continued to rise since the global financial crisis, despite some minor setbacks, and has reacted positively to the election of Donald Trump as president.

With that in mind, Darius McDermott, managing director of Chelsea Financial Services (pictured), said the law of averages is likely to favour investors if the current bull market reflects previous episodes.

He said: “Looking back over the past 90 years or so, the average US bull market has lasted 8.9 years with a cumulative total return of 468 per cent. The current bull market has lasted roughly 8.5 years and returned 300 per cent.”

Performance of S&P 500 over 9yrs

Source: FE Analytics

However, McDermott said views about the outlook for the US market were polarised with some asset managers backing the continuation of the bull run, while others have been a bit more cautious.

While opinion over whether the US bull run is split, McDermott said there are several reasons to remain optimistic over the outlook for the market.

“The US is enjoying its third longest period of economic expansion since 1850 and, despite the IMF cutting its forecast recently due to 'policy uncertainty', the economy is still forecast to grow by 2.1 per cent this year and next,” he said.

“Unemployment is low, corporate earnings are strong and, importantly, earnings expectations remain high. Small business sentiment is as high as it has been since 2004.”

He added: “The US dollar is seen as a 'safe haven' currency and the economy, whilst not perfect, is arguably more solid than any other in the developed world right now.

“The US is jam-packed full of exciting, entrepreneurial companies – both large and small. It's also home to a large proportion of the world's healthcare and technology companies, many of which have products or services that are required, no matter how bad things get. With dividends also continuing to grow, there are still going to be investments worth making.”


There are also reasons to remain cautious, McDermott said, noting high valuations and the prospect of higher interest rates.

“Valuations are now at their second highest in history, with the highest point coming just before the dotcom crash of 2000–2001,” he said. “Many experts say they wouldn't be surprised if there was a market correction.”

McDermott added: “While nobody expects the Fed to raise rates too quickly or by too much, any increase will have an impact.

“There is a worrying amount of debt in the auto sector, which could become stressed and consumer spending - which is already falling - could slow further. In a land where ‘more spending’ is the ultimate mantra, this does not bode well.”

Finally, McDermott noted that US president Donald Trump also presented a greater challenge to markets.

“There does seem to be a very concerted campaign to have Trump removed from office – how much progress this will seriously make remains to be seen,” he said. “But it does add to the uncertainty.

“Policies are muddled and, to quote a colleague, ‘the average tenure of senior staff in the White House is now counted by the hour, such is the turnover’.”

As such, McDermott highlighted three funds for investors to consider in the current market environment.

 

Brown Advisory US Flexible Equity

The first fund highlighted by McDermott is the $282m Brown Advisory US Flexible Equity, managed by Hutch Vernon and Maneesh Bajaj.

McDermott said the UK version of the fund was launched in 2014, although a parallel version of the fund has been running for more than 20 years in the US. The strategy seeks out attractive or improving businesses at “bargain prices”.

Since launch in the UK, the fund has delivered a 65.19 per cent rise compared with a gain of 74 per cent for the S&P 500 index, although it has outperformed the average IA North America fund’s return of 63.87 per cent.

Performance of funds vs sector & benchmark since launch

Source: FE Analytics

The fund has 42 holdings and has overweight positions in the consumer discretionary, financials and information technology sectors.


Conversely, the fund has zero weightings in materials, telecommunications and utilities sectors and significant underweights in the consumer staples, healthcare,industrials, energy and real estate sectors.

The fund’s largest holding is payments business Visa, which represents 5.4 per cent of the fund. Other significant holdings include Google parent Alphabet and Warren Buffett investment vehicle Berkshire Hathaway.

The fund has an ongoing charges figure (OCF) of 0.93 per cent.

 

Schroder US Mid Cap

The second fund chosen by McDermott was the five crown-rated Schroder US Mid Cap fund managed by FE Alpha Manager Jenny Jones.

“Run out of New York by Jenny Jones and her team of analysts, this fund has a focus on small and medium-sized companies,” he said.

“To help manage risk, stock ideas fall into three different buckets. ‘Steady eddies’ or less cyclically-sensitive stocks act as ballast in the portfolio. ‘Mispriced growth’ are stocks where Jenny feels the market has not fully understood the company’s earnings potential. The last, and smallest, bucket is recovery type situations.”

Since the £2bn fund launched fund in 2005, it has risen by 331.9 per cent, compared with a 357.55 per cent increase in the Russell 2500 benchmark.

Performance of funds vs sector & benchmark since launch

Source: FE Analytics

The fund has 115 holdings, the majority of which is invested in companies with a market cap below $3bn.

The fund’s largest stock position representing 2.3 per cent of the portfolio was Aramark, which provides clients with food, facilities and uniform services.

However, it should be noted that the largest individual holding was a position in the Schroder ISF US Dollar Liquidity fund, which represented 4.4 per cent of the portfolio.

The fund has an OCF of 0.91 per cent.


Lazard US Equity Concentrated

McDermott’s final fund is Lazard US Equity Concentrated, overseen by Christopher Blake. The offshore fund invests across the market cap range and aims to deliver mid-to-long-term growth.

“This extremely concentrated US fund typically holds no more than 20 to 25 companies, ranging in size from the fairly small all the way through to the very large,” he said.

“It contains the best ideas from across Lazard’s US equity funds. While the strategy was launched in 2003, the fund only became available to UK investors last year.

McDermott added: “It is genuinely different to the market and has consistently beaten the S&P 500, outperforming in the majority of calendar years since its launch, which is no mean feat.”

Performance of funds vs sector & benchmark YTD

Source: FE Analytics

The largest holding in the fund is Coca-Cola, representing 8.2 per cent of the portfolio, closely followed by medical devices company Medtronic. Other significant holdings include Alphabet and communications firm Motorola Solutions.

The fund has n OCF of 0.99 per cent.

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