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Navigating the challenges of US equities

US equities is a notoriously difficult market in which to succeed, as demonstrated by the lack of consistent outperformance in the sector.

Bestinvest’s recent Spot the Dog ranking of the worst-performing funds included 23 portfolios in the IMA North American sector. This is up from zero funds in the previous report and accounts for 38 per cent of the 61 funds in the sector.

Identifying active managers who can consistently beat the benchmark is difficult. Bestinvest places just two funds, UBS Growth and JPM US, in its best of breed category. However, active managers remain confident that the benefits of US equities outweigh the potential challenges.

UBS US Growth fund portfolio manager Grant Bughman says: “We have tried to take advantage of volatility when it causes valuations for our favourite, sustainable, dominant business models to be mispriced.

“But we also continue to manage risk rather closely and look to avoid companies whose futures are more closely tied to the direction of global demand.”

This approach saw the fund pull back from economically sensitive sectors such as energy, industrials and materials in the summer of 2011, while weightings in consumer discretionary and technology stocks were increased on attractive valuations at the end of last year.

Old Mutual North American fund co-manager Ian Heslop agrees there are significant challenges to actively investing in US equities.

He says: “I would argue the North American equities sector is one of the hardest sectors to get consistently right. It is just efficiency of the pricing mechanism in the North American equities market, it is very well researched and very quick to incorporate new information.”

Heslop, whose fund is first-quartile over three years, says an important part of the investment process is rotating the portfolio with changes in investor risk appetite. The managers attempt to determine what investors are likely to buy in the short term and position their portfolio in line with this at the start of the buying cycle.

He says: “We had been reasonably pro-market towards the end of last year but now you can safely say the portfolio is reasonably defensively placed, both at sector and intra-sector levels.”

Schroders US Alpha fund manager Joanna Shatney claims longer-term trends also make US equities an attractive proposition for active managers.

She says: “We believe the US is significantly better positioned over the long term than many developed markets because of the level of innovation and positive benefits of demographics that naturally position the US for growth.

Shatney says these factors, which she plays through overweights to the technology, healthcare and consumer discretionary sectors, will help US companies to deal with the short-term challenges thrown up by the global economic slowdown and the long-term problems created by the country’s looming fiscal cliff edge.

Premier Asset Management pooled funds investment director David Hambidge remains unconvinced by US-focused funds and has just 3 per cent of vanilla exposure to US equities in the Premier Multi-Asset Growth fund, with nothing in his other four funds.

Hambidge says: “As fund pickers, the US does not really float our boat because if you can name a worse active managed sector relative to its benchmark than the North American sector I would be surprised.”

However, Bestinvest senior adviser Adrian Lowcock expects to see the North American sector improve over the coming two years as weaker funds start to exit the market and remaining managers demonstrate their ability to outperform the benchmark.

“We will see a swing back to active managers at some point,” he says. “The key thing is it will change at some point because these things always swing around.”


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