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American values

Matt Davis reports that fund companies are finding bargains in the US

Over the three months to November 28, the annual return in the Investment Management Association’s North American sector was 7.5 per cent, compared with the UK all companies sector’s 3.8 per cent.

This fact has not escaped fund managers. Prudential’s 65bn with-profits fund doubled its exposure to US equities from 1bn to 2bn last week. Director of portfolio management Martin Brookes says he switched money out of the fund’s Asian and European holdings and says the primary attraction of the US is cheap valuations.

Norwich Union raised its balanced fund’s exposure to the US in October. Head of balanced funds Stephen Cleal says European stocks’ growth outlook looks relatively anaemic compared with the US.

Threadneedle American manager Andrew Holliman expects US earnings’ growth to continue at around 9 per cent in 2006 and agrees that valuations are undervalued relative to other markets.

Holliman says concerns over the weakness of the dollar, a prolonged rise in interest rates and overstretched consumers have dogged investor perceptions of the US in recent years. But he says the dollar has revived and interest rates are nearing the peak of their cycle, although the market is pricing in a possible two further rises.

On the consumer issue, however, Holliman says there are still valid concerns as Americans cannot continue spending at recent levels.

But Tilney American Growth manager Jane Drake says early indications from post-Thanksgiving sales suggest that consumer fears may be over-egged. She has been reducing her fund’s exposure to the retail sector but she is expecting a Santa Claus Rally over Christmas on selected stocks such as BestBuy, which has introduced specialist sales units in its stores aiming at the home cinema sector.

Drake says: “You could argue that with fuel prices being high, people may want to stay in a bit more and are more likely to buy a home movie system as a result. Stocks such as Netflix are very attractive now, having cornered the market and being in a position to grow market share in home DVD rentals.”

Nevertheless, Holliman says there is anecdotal evidence that retailers are luring customers in the run-up to Christmas by running loss-leading discounts. He says uncertainty over consumers is also linked to concerns over the housing market.

Holliman and Drake believe that there are opportunities in the US housing sector but very much on a stock-selective basis. Drake has continued to hold housebuilder Lennar which could benefit from housing needs in Texas following an influx of refugees after Hurricane Katrina.

Holliman says: “The market is pricing in a quite significant deceleration in housing but it is not nearly as overstretched as housing in the UK. This particular housing stock is trading at just six times earnings and expecting strong profit growth. If it were trading at 20 times, then we might be more concerned.”

Renaissance US growth investment trust investment manager Russell Cleveland says price/earnings ratios in the US are between a bear and bull market.

He says that the US’s entrepreneurial culture continues to reward investors who believe in the country’s characteristic “megastock wins”, citing the likes of Microsoft and Walmart as examples. His trust is up by 23.4 per cent in net asset value terms over the year to the end of September.

Cleveland says: “The US and China are the world’s two biggest entrepreneurial economies. If you had invested 1,000 invested in WalMart in 1970 it would be worth 5.7m today but few expected this from a small Arkansas discount store. Great winners in the US start with entrepren-eurial leaders with a clear vision for the future.”

With the US comprising 55 per cent of the global economy, Gartmore head of multi-manager Bambos Hambi says the opportunity to make money in the country is strong. But he is not raising his exposure and remains significantly underweight, with US holdings only making up 28 per cent of his global alpha portfolio, mainly through the JPMF US dynamic fund.

Hambi bases his view on a belief that global economic growth will continue to be volatile over the next year, and that doubt over the US consumer adds risk on the downside.

He says: “The life com- panies have mainly been reducing their underweight positions in the US. You might make money out of the country but we just believe there is more money to be made elsewhere where risks are lower. In Japan and Europe, growth is linked to government reform rather than global growth.”


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