While most didn’t expect him to win, Donald Trump’s first term as president has been eventful as he has followed through on some of his more popular pledges made during his election campaign.
As William Sobczak, investment trust analyst at Kepler Trust Intelligence, noted, since Trump was inaugurated, the landscape of the US market has arguably transformed.
Having failed to reform healthcare, the president was able to secure support for tax cuts for businesses, providing further support for soaring US market.
A dramatic change to the country’s previous model of taxation, particularly to the taxation of US corporations’ foreign subsidiaries, was also introduced.
“With the new tax bill, not only will US companies benefit from lower taxes in the future, but they were also incentivised to bring offshore cash back to the US through an additional one-time tax cut to 15.5 per cent on cash that was repatriated,” explained Sobczak.
Tax rates prior to the reforms
Source: Kepler Trust Intelligence
The policy certainly had effects on both the economy and the market, as, the analyst noted capex (capital expenditure) has soared in 2018, one indication that his policy is working as intended.
Indeed, the sectors with higher tax rates such as consumer discretionary and energy have been among the best performers so far this year.
While some other factors are involved, the Kepler analyst said the one-off boost for future earnings has helped the sectors to outperform.
Another major factor behind the stock markets’ gains since the tax reforms, said Sobczak, was the increase in share buybacks, which enhance earnings per share and benefit shareholders.
The largest turnaround in performance after the reforms was seen in the energy sector, which has also benefited from a rise in oil prices.
As such, Sobczak believes a trust that could benefit if these factors continue to have effect given its sector allocation is Blackrock North American Income.
The £119.8m trust is overseen by Tony DeSpirito, David Zhao and Franco Tapia and has a 10 per cent allocation to the sector, with Suncor Energy a recent addition to its top 10 holdings.
“The managers believe that oil markets have now passed through the weakness seem in 2015-2017, and declining oil production rates from certain areas have helped create an environment of higher prices and US production growth,” Sobczak highlighted.
According to data from the Association of Investment Companies (AIC), the trust is trading at a 0.6 per cent discount to its net asset value (NAV), yields 4.6 per cent and has an ongoing charge of 1.08 per cent. It is not geared.
Performance of trust since introduction of tax reform
Source: FE Analytics
The other beneficiary of the tax reform is the consumer discretionary sector, where the new 20 per cent tax deduction for small businesses has had a positive impact on smaller firms by allowing them to protect one-fifth of their earnings from taxation.
This, the Kepler analyst noted, effectively lowers the top marginal tax rate on small businesses from 40 per cent to 30 per cent.
“With this extra income, small businesses can afford to expand and hire, again boosting both employment, the economic outlook and, in turn, the consumer discretionary sector,” he explained.
The sector has also been benefiting from the onward march of the economic cycle in the US and the strong GDP growth and job growth seen in 2018.
One such fund that offers investors a significant exposure to the sector is Baillie Gifford US Growth with a 27.8 per cent weighting.
“The trust’s portfolio is made up of companies that they believe have exceptional growth prospects, and the trust holds these companies on a long-term view,” he said.
“The managers see them as the major drivers of market wealth creation, largely due to their outsized role in driving productive innovation in society.”
Another sector that has done well since the reforms is the technology sector, although it already had one of the lowest tax rates before the reforms.
Two funds that can offer investors exposure to the sector are the £450.7m Allianz Technology Trust and the £974.8m JPMorgan American trust.
“Allianz Technology Trust has benefited greatly from the huge profits in the sector and has a long-term track record as a standout performer within the technology sector,” said the analyst. “It offers exposure to companies involved in ‘innovative disruption’ and invests in a wide variety of sectors, ranging from automobiles to web services.
“The managers at JPMorgan American utilise [meanwhile] a truly bottom-up approach, aiming to own any kind of stock as long as it offers what they view as the greatest potential for capital growth. This encompasses growth stocks and value stocks, as well as large-, mid- and small-caps.”
Run by Garrett Fish and Eytan Shapirol, JPMorgan American offers a ‘core’ exposure to US equities, and has outperformed its benchmark over five, 10 and 15-year periods, putting the fund in the top quartile of both open- and closed-end funds over these time frames, noted the analyst.
Indeed, JPM American is up by 421.53 per cent over 15 years compared with a gain of 271.92 per cent for the average trust in the IT North America sector and a gain of 322.92 per cent for the S&P 500 index.
Performance of trust vs sector & index over 15yrs
Source: FE Analytics
Data from the AIC shows the trust is trading at a 4.9 per cent discount to its NAV, is 6 per cent geared and has ongoing charges of 0.55 per cent.