Financials, IT hardware and industrials are all sectors in the US being undervalued by the market, according to Premier Asset Management fund manager Jake Robbins.
Robbins, who oversees the four FE Crown-rated Premier Global Alpha Growth fund, is the most underweight to he has ever been market since taking over the fund in November 2011, but he does not believe the whole market is overvalued.
Since Robbins took charge, the £113.4m fund has been a top quartile performer in the IA Global sector, returning 142.24 per cent, as the below shows.
Performance of fund vs sector and benchmark since manager start
Source: FE Analytics
Historically the £113.4m fund has had an overweight position to the US market during his tenure but his current exposure is just 48.5 per cent.
“We actually have less in the US now than we have had for the majority of the time that I have been here since 2011,” Robbins said.
“The FTSE All World has about 56 per cent in the US so we are about 8 per cent underweight and if you went back three or four years we probably had over 60 per cent in the US.”
However, the manager said that while the market overall looks expensive there are areas of value for investors that are more selective.
“For me, when you look at the equity market yes it looks quite expensive from a top-down basis but if you look within that equity market you have some very expensive sectors like the FANGs [Facebook, Amazon, Netflix and Google],” he said.
“A lot of the consumer staples also look expensive to us and so that’s where we have taken quite a bit of our weighting out of the US.
“They’ve grown slightly in almost any environment but it is not very exciting, whereas what we are finding now is there much more attractive growth from the more cyclical sectors which still trade on relatively attractive multiples.”
The first of the areas the manager has been buying is the financial sector, which should be one of the main beneficiaries from improving global economic growth.
“The world we are in at the moment is quite an unusual one I think because if you look at bond markets they are telling you we are heading for a recession essentially or that inflation will never happen,” Robbins said.
“But if you look at the economic data you’ve got very strong labour markets to the point where wage growth is possibly inevitable.
“Also, it is not just the US or Germany or the UK anymore, which have been growing quite strongly throughout the post-crisis, but you are seeing the likes of France, Italy, Japan, etc grow for the first time in many years.”
Improving economic conditions should benefit banks and other financials as more people gain the confidence to borrow more money, he said.
However, this is not being priced into the market, particularly in the US where the banks were among the first to sort out issues in the aftermath of the financial crisis.
“The US is not that cheap a market anymore by historical comparisons but the financial sector is genuinely quite cheap,” explained Robbins.
“These are businesses that clearly got traded down to extremely distressed levels in the financial crisis but what the US [government] did was force them to recapitalise very early back in 2009.
“So you don’t really have any of the balance sheet questions that you have with maybe the Italian banks or Deutsche Bank for instance.
“They are well capitalised banks, the economy is growing, there is growing demand for corporate and personal loans and yet these companies generally trade below or around book value.
“This is despite the fact that profitability is already quite good and whilst the bond market is not telling you that interest rates are rising, they probably will continue to rise.”
The other cyclical area the manager is finding new ideas is in the industrials sector, despite the fact that the S&P 500 Industrials index has been trending higher in recent years, returning 101.02 per cent over five years – more than the broader S&P 500.
Performance of indices over 5yrs
Source: FE Analytics
“You can still find a lot of industrials that do not look very expensive relative to their past history,” Robbins said.
“If you look at their margins there has been a lot of cost-cutting that has gone on in the past five or six years.
“They are very lean manufacturers currently and as you see sales pick up you are beginning to see these margins rise quite strongly and that really drives very strong growth.
“If you can buy those businesses at below price-to-book values that you have seen them trade on before then we think that is quite good value.”
It is not just cyclical areas that the manager is buying however. Indeed, Robbins noted that technology remains a fundamental driver of the portfolio.
“I do think technology is the structural growth story of probably this century and the US is very good at it,” he said.
“I think because of that and because there are so many companies there –you don’t have to buy Amazon on 100 times earnings – you can buy genuine high-growth, high-quality, cash-rich technology companies on 14-15 times earnings.”
As such, the fund is 16.6 per cent weighted to the sector, though the manager is avoiding the expensive FANG stocks.
Performance of index over 5yrs
Source: FE Analytics
Robbins said: “Unlike the UK for instance or even Europe, the US’s biggest sector is technology and there is no two ways about it, technology is permeating through life.
“But we don’t own things like the Amazons and Facebooks of the world because whilst they may be quite high-growth businesses we just think that valuations are very high.”
“What we have found is that a lot of the component manufacturers who make the chips that go into all these devices actually trade on much more reasonable multiples.”
He added that as the US has many of these companies, there is more choice and therefore the stocks trade on lower multiples compared to peers in Europe.
“In Germany for instance you have Dialog Semiconductor who provide Apple with semiconductors. Now that trades on 20 times earnings whereas in the US you can get a lot more higher-quality businesses with higher growth that aren’t quite as reliant on Apple that trade on 14-15 times earnings,” he said.
“So that is why we focus on the technology sector in the US – not through the names that you would recognise most but through some of these component suppliers.
“And the key thing with those as well is that it doesn’t really matter whether the next Apple or the next Samsung is the dominant market share gainer because they supply all of them.”