View more on these topics

US mid-caps’ time to shine

US-Flag-USA-America-700x450.jpg

Global financial markets were weighed down by the uncertainty around the outcome of the US presidential elections for the latter half of 2016. Then, the shock: Donald Trump’s victory.

US equity markets have been on a high ever since, with the S&P 500 index gaining almost 5 per cent in US dollar terms. Even rising inflation and the threat of further increases in interest rates have not been able to dampen the rally.

The optimism seems to have spread to the International Monetary Fund,which revised its growth forecasts for the US up 0.1 percentage points to 2.3 per cent for 2017 and 0.4 percentage points to 2.5 per cent for 2018 compared with a lacklustre 1.6 per cent in 2016.

Investor sentiment has been buoyed by Trump’s promises of tax cuts, increased infrastructure spending, kick-starting domestic production and creating more jobs. A Republican-dominated Congress will ensure most of what he has promised in terms of tax cuts and spending is fairly straightforward. While the effect of tax cuts can be felt straightaway, infrastructure spending will only boost the economy in the longer term.

But a protectionist trade agenda and aggressive foreign policy are more likely to add to uncertainty in the markets in the coming months, so volatility is set to increase.

That said, the silver lining of Trump’s anti-globalisation rhetoric has been the outperformance of small- and mid-cap companies, where around 82 per cent of revenues are domestically generated. Analysts believe they are set to gain further and outperform their large-cap peers.

One fund highly favoured in the IA North America sector is the £1.8bn Schroders US Mid-Cap fund, headed by Jenny Jones since April 2005. Jones is an FE alpha manager who has maintained a consistently high score over rising and falling markets.

Jones and her team of analysts select medium-sized US-listed companies based on fundamental research. The team believes smaller companies are typically at the early stages of their expansion and under-researched compared with their larger peers, hence offering greater scope for outperformance.

sectorfundperf

KeyfactsThe investment approach focuses on three types of companies: mispriced growth, for those with a valuation that underestimates future growth potential; steady Eddies, for those with stable and predictable earnings that provide a defensive ballast; and turnarounds, which are typically distressed or out of favour but have recovery potential. The first two types account for about 90 per cent of the portfolio, which normally consists of around 120 holdings.

Given stock selection is based on such strong fundamental research, it is no surprise the fund has been in the first quartile over three, five and 10 years, consistently outperforming its benchmark and the IA North America sector over the same periods.

With respect to the effect Trump’s policies might have, Jones believes that, while most of the goals are likely to be fulfilled, they seem to be fully priced in. In addition, since the stocks in the fund are held with a three-year view in mind, its positioning is unlikely to change in the short term.

According to FE’s research team, the defensive properties built into the fund through the steady Eddies should continue to limit losses in falling markets, while the underlying focus on strong companies with promising growth prospects should capture a large portion of market gains. UK investors should bear in mind, however, that since it does not hedge currency exposure, returns can be heavily influenced by movements in the US dollar.

The fund is best suited for those looking for exposure to the US domestic economy, who are willing to buy and hold for at least seven years and who want to limit their exposure when markets fall. It sits in the FE Invest Approved list, has an OCF of 0.91 per cent and an FE Risk Score of around 103 currently (zero being cash and the FTSE 100 being 100).

Namrata Nanda is institutional marketing manager at FE

Recommended

Darius-McDermott-700x450.jpg

How to invest in a post-truth, post-Trump world

Oxford Dictionaries’ 2016 word of the year was “post-truth”. Its definition – circumstances in which objective facts are less influential in shaping opinion than emotion or personal belief – renders it an obvious choice for the politically charged year that was. For investors, however, the pertinent question is how facts versus sentiment will influence markets […]

1

Trump rolls back conflict of interest rule on advice

President Donald Trump is calling for a review into advice conflict of interest rules as part of plans to undo measures to prevent risk-taking in financial services. The Guardian reports the Department of Labor has been ordered to review the “fiduciary rule”, which is designed to protect US clients’ retirement money from conflicted advice. The […]

Greg Broomer 2

Survey looks at the challenges facing businesses post auto-enrolment

A survey conducted by Johnson Fleming at the Pension & Benefits Show 2014 highlighted the key challenges faced within organisations post auto-enrolment. The results showed that communicating the changes and the value of them to staff, and receiving timely data from the payroll provider proved to still be the most challenging aspects of managing an auto-enrolment scheme.

Thumbnail

Neptune video: UK economy: a sustainable recovery?

After years of a slowly brewing economic recovery, the UK has seen a strong rise in growth in recent months. Mark Martin, manager of the Neptune UK Mid Cap Fund, discusses the strength of this recovery and whether it is sustainable.

In the video, Martin addresses the following:

• Structural features supporting the UK economy
• UK mid-caps and the potential for M&A activity
• Valuations and opportunities in house builders

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment