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Adviser Fund Index

The Adviser Fund Index panellists displayed a bearish stance on American equities in the second mid-season questionnaire.

The survey, which was conducted in February, showed that seven of the 15 respondents expect the US stockmarket to underperform other major regions over the next 12 months. Eight of the panellists predict that the US will generate the lowest returns over the next three years.

Confidence in the US economy has been hit recently by poor consumer spending data and rising defaults in the sub-prime lending sector. Defaults have increased because of falling house prices and rising interest rates. The downturn caused the New York Stock Exchange to suspend the listing of New Century Financial, a real estate investment trust, on March 13.

Tom Walker, manager of Martin Currie’s North American fund, says he has taken underweight positions in the banking and consumer discretionary sectors. However, the £110m fund, selected for the AFI last November, generally takes a bottom-up approach to stock selection. Walker uses Martin Currie’s Dynamic Stock Matrix to screen stocks but adds that he is not dependent on quantitative analysis.

He points to Starwood Hotels as an example. The firm received negative DSM scores because of its apparently high valuation and geared balance sheet. However, Walker bought into the firm on the basis that it was selling down assets. Walker operates a strict 40-stock portfolio and adds that American companies are good value, trading at below their long-term average price-to-earnings ratios.

Other names in the fund include Corning, MEMC Electronic Materials and CVS, a food and drug retailer.

Despite Walker’s underweight in consumer discretionary, he has a significant holding in Gildan, a Canadian firm manufacturing socks and T-shirts in Central America. Walker says the fund has been largely unaffected by the sub-prime issue although his holding in Merrill Lynch was hit in the first quarter.

The fund is biased towards large caps although three stocks have capitalisations of less than $5bn (£2.5bn.) Overweight positions include technology, industrials and energy, where Walker has exposure to oil service companies.

Overall, Walker is upbeat on the American economy and says market expectations for corporate earnings growth are too pessimistic. He also points to the strong performance of high-end retailers as a sign of resilience in consumer spending.

The problems seen in the sub-prime sector will remain “relatively contained”, adds Walker, although he says housing itself will have “a horrible year”.

Walker says the downbeat attitude of some British investors to America is linked to poor returns because of the falling dollar. Returns for British investors were hit further this month as the pound reached a 26-year high, breaking through the $2 mark.


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