Despite the US equity market grinding higher over 2021, Smith & Williamson Investment Management’s Model Portfolio Service (MPS) is sticking to its underweight US equity market allocation.
Earlier in the year, James Burns, co-manager of the Smith & Williamson MPS, shifted portfolios to underweight the US equity market for the first time in a decade in order to overweight UK equities.
He shared the investment firm’s three core UK equity funds with Trustnet in February.
However, the move has yet to pay off with the US equity continuing to drive global markets higher despite what Burns said were “challenging valuations”.
“We moved underweight US at the start of the year and while it hasn’t worked yet, our strategy team’s view is that it is better to look outside the US for equity exposure,” he said.
Year-to-date, the US S&P 500 index has delivered a total return of 30.7%, outpacing the broader MSCI World index return of 24.5% and the FTSE All Share’s return of 17.4%.
Performance of US, UK and World equity markets year-to-date
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Source: FE Analytics
Burns continued: “We’re unlikely to cut our current underweight any further but we are expecting at some point to see a degree of rotation out of the US into the areas we are overweight.
“But we continue to have significant exposure to the US and are very happy with the funds we own.”
He said the Artemis US Extended Alpha fund was one of Smith & Williamson’s key positions for US exposure.
“Artemis US Extended Alpha forms one of our core positions and has been held in the portfolios for a number of years,” he revealed. “The fund is not as high profile as some, but we think the fund manager William Warren is fantastic.”
Warren is an FE fundinfo Alpha Manager who has outperformed his peer group for 5 out of the 7 years he has been managing portfolios at Artemis. He also runs the Artemis US Absolute Return fund.
Burns added: “As the fund has a 130-30 structure, it can short stocks, and it does. This is one of the reasons for holding it in the portfolio, as we believe the ability to short will be very helpful in the US.
“There are fewer opportunities to do that at the moment – the managers are careful about stocks they think are overvalued but are potentially going to be ramped up by the market – but we like the fact that if we have to have US exposure, it is attractive to hold a fund that can perform well in both up and down markets.”
Alongside the Artemis US Extended Alpha fund, the team also holds the Vanguard US Equity Index for a passive US exposure.
Although the Artemis fund and the S&P 500 tracker both have overlapping exposure to the US tech giants such as Alphabet, Amazon, Apple and Microsoft – the index has a broader market cap-weighted exposure to the full plethora of both growth and value stocks within the US equity market.
The manager also included the Monks Investment Trust as part of the fund’s US exposure, despite the fact that it is a global fund.
“We added Monks Investment Trust to the top two models of the MPS in the August rebalance,” Burns explained. “The trust is not solely invested in the US but has a 55% exposure to the market, primarily focusing on the areas we think future growth is going to come from.
“Holding this trust within the portfolio has been advantageous in order to counter the large value tilt we have elsewhere.”
Over the past five years, the Monks Investment Trust has delivered a total return of 159.2%, compared to 90.6% from the IT Global sector average.