The company wants to give investors access US equities through an investment trust, as opportunities have been limited for UK investors.
The US is seen as favourable relative to Europe in terms of growth, profitability and the health of the banking system, despite some negative factors such as high unemployment. F&C says that although economic growth is slow in the US, it has still broadly outpaced Europe.
The new trust will comprise 40 to 50 stocks that are seen by F&C as temporarily undervalued. They will be drawn from a range of industries and sectors to provide diversity. F&C starts with a universe of around 1,800 stocks of US companies with a market capitalisation of at least $1bn, but will focus mainly on those with a market cap of at least $3bn. This universe is screened down to a shortlist of around 250 stocks, of which 40 to 50 will make it in to the final portfolio.
Stocks are selected on the according to three value characteristics – a price/earnings ratio below the market, a price/book ratio below the market and a dividend yield above the S&P 500. The trust will be able to borrow up to 20 per cent of its net asset value but there are currently no plans to use this borrowing facility.
The trust’s focus on total returns through a value strategy applied to bigger US companies should help to protect capital in difficult markets. Many bigger US companies have strong balance sheets and plenty of free cash, enabling them to focus on returning capital to shareholders through dividends and share buybacks. This can provide a defensive element to a portfolio, along with the value bias. The trust should always pay less than the intrinsic value of a stock, which should result in greater scope for price rises relative to falls.
However, the investment trust structure will not appeal to everyone given that investment trusts can drift to wide discounts to net asset value.