Is it a good time to invest in US equities?

If you hold shares in one of the global investment trusts it is more than likely you are already invested in US companies in one form or another, so you may not feel the need to opt for a dedicated US fund.

If you are not, you will probably have seen the main US index, the S&P 500, rise over the past few years, particularly during 2020, and wondered if you are too late.

There are a couple of points to make here. The S&P 500 is a bit like the FTSE 100 for UK equities, in that many of the companies listed on both exchanges don’t get the majority of their business or income from their domestic economies.

True, the S&P 500 has more US- focused companies but consider how dominated it has been in terms of performance over the past few years by global players such as Amazon, Microsoft or Facebook. It is like the FTSE 100 in that it is an exchange for international companies that just so happen to have started out in the US.

The other challenge for UK investors is the volatility of the US market. Ordinarily, the closed-ended nature of an investment trust, with a limited number of shares available, means you are not subjected to wild swings in valuation. But there are only a handful of investment trusts to choose from and in general their performance is indifferent.

One option would be an open-ended fund such as a unit trust or Oeic, and if you look at the Morningstar statistics at the back of our hard copy magazine there are two North America categories with a choice of around 170 active funds, plus a good selection of passive or exchange-traded funds (ETFs).

In terms of performance of the active open-ended funds the standout is Baillie Gifford North American, which over 10 years to the end of January 2021 turned £100 into £991. This shows the benefit of not only the best active management, but of staying invested for the long term with a good manager like Baillie Gifford.

Cycle of growth

Is now an appropriate time to buy into US equities, given the strong performance of the index and some active funds? I posed the question to a fund manager that has a long track record of investing in the US markets.

Cormac Weldon is head of the US team at Artemis, which many private investors will be familiar with because of its long heritage in UK and global equities across a range of funds and its income-generating strategic bonds.

Weldon oversees three US equity funds at Artemis, which, in performance terms, have doubled investors’ money over the five years to the end of January, which is a good return. Prior to Artemis he built a very good reputation with Columbia Threadneedle, so his views are worth taking note of.

He is broadly positive of the stimulus the new Biden administration is putting into the economy and expects growth – as measured by GDP – to be good over the next two years. He believes that, in time, interest rates will rise modestly and with that will come a little bit of inflation, which will give business some pricing power.

Experience tells him to be more cautious about the impact of the president’s plans for growth in renewable energy and the so-called green economy.

Where Weldon’s knowledge of previous economic cycles comes to the fore is in looking for investment ideas in ‘cyclical’ companies. The pandemic has created a very different economic cycle but the impact is similar to typical recessions – job losses, weak businesses going under.

He says many companies ran down their inventory of stock last year as the full impact of the virus began to be recognised, and this is one area where he sees good opportunities. He points to large businesses like Caterpillar, that make big-ticket goods. Equally, companies such as the supermarket giant Walmart ran down its stocks, so a pick-up in these kinds of operations will be very positive.

Another area where Weldon spies opportunities is housing in the US. Historically, the state of the housing market has been a good indicator of growth in the economy and the stock market.

House prices rose in many areas of the US last year, as they did in the UK, and again like the UK, there is a need for greater housebuilding in America combined with existing homeowners doing their places up and trading up to different properties.

Weldon invests selectively in some of the large technology names we are all familiar with but is finding more scope in traditional sectors such as financials and industrials.

Uncut gems

Richard de Lisle is manager of VT de Lisle America. The fund invests across all companies on US stock markets but has traditionally found some investment gems in backwaters where few other fund managers look.

De Lisle is currently doing very well out of the company that owns the ‘Build a Bear’ toy business, loved by small children all over the world, and the producer of Green Giant sweetcorn.

He has a number of interesting themes, some close to those in the Artemis funds, including a company that manufacturers tow bars to pull trailers or a business that makes paddle boards, both part of a theme he calls the “great outdoors”.

De Lisle’s fund is 10 years old and has produced impressive returns over that decade as well as in the past 12 months.

Recovery position

Investing in the US going forward is not so much about picking which technology stock might be the next big thing but rather getting back to basics, looking at traditional areas of the US economy that will do well as the country comes out of recession.

Splitting a sum across either the Artemis US Select or US Equity funds and VT De Lisle America – and staying put for at least five years – could prove to be a good way to take advantage of a recovery in the economy.

One thing most people I have spoken to are agreed on is that the US markets are unlikely to be dominated in performance terms by the same five companies that drove the S&P 500 to such high levels last year. Instead, there should be a broadening out of companies that do well, which means being invested with funds that have a wide approach is a good bet.

Lawrence Gosling is editor-in-chief of What Investment.

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