US tiddler is no Mickey Mouse fund

Whatever question marks hang over that with-profits fund in Edinburgh, Standard Life is pushing hard to make a name for itself in North America. Standard Life American Equity Growth is far from a shoot-the-lights-out fund that can move from the top of the tables to the bottom before advisers collect the first trail commission, although its holding in Disney has shot up in value since Comcast’s surprise $66bn bid for the animation giant. Instead it has offered solidity based on top-quartile performance over three years – it slipped 29.9% compared with a sector average 34.1% fall and it shows an above-average 20.1% gain over the past year, according to Trustnet. Nor, investors will be glad to know, does it depend on smaller companies. Take a look at the top 10 holdings – these are all names known in York as well as New York. The fund features Microsoft, Goldman Sachs and General Electric. It is managed in North America. But those who worry it will be caught up in some Wall Street scandal can rest easier. The management is in faraway Montreal. And there is some more reassurance for nervous investors – while fund manager Norman Raschkowan, a Canadian, has been with Standard Life for all his 23 working years, and has headed the US equity team since 1990, his decisions are backed by a team of 21 analysts. As American Growth itself is only worth $15m (around £8.5m), that works out at more than two analysts for every £1m under management. The team does, however, cover other funds in the Standard Life North American stable, where it has a total of $3.6bn in equity funds. UK investors have always been dramatically underweight in US equities. They never trust the economy, and many are sceptical of Wall Street’s recovery. Look at how the Dow has bounced back to near December 1999 levels while our FTSE 100 is still a good 35% shy. But whatever the indices show, the world economy is set to grow this year, and what’s good for the globe can be great for American capitalism. “I’m very positive on global and US growth,” says Raschkowan. “The US economy was strong in the last two quarters of 2003 when worldwide growth was 3.2%. And it picked up more of that growth than Europe or Asia. Now world growth is moving into the 4-4.5% range, the question is whether the US will grow more rapidly on the back of that expansion or whether Europe and Asia will play catch-up.” He concedes that Asia and Europe could make better progress this year, and there will be some shifting out of the US. “We may have seen the best of the US versus the rest of the world. But you cannot ignore the US and you should remain overweight in any balanced portfolio. The corporate newsflow continues to improve and profits should surprise on the upside in the spring,” he says. The weakness of the dollar penalises returns for UK investors. But it is favourable for US industry – provided the continuing descent is controlled and gentle and not sudden and disruptive – so companies see a more than counterbalancing boost to revenues and valuations. “Commodities do well out of dollar weakness so I have major holdings in nickel producer Inco and aluminium giant Alcan,” says Raschkowan. The fund is managed with a limited range of stocks – it can be as little as 30 but now, and more usually, it is around 50. The current portfolio is pro-cyclicals and strong on natural resources. It is overweight in industrials. “The theme is leverage to economic growth. That means an overweighting in industrials, predominantly in the mid-cap size area, which accounts for 23% of the portfolio. But I also believe there will be a move to the mega-caps (the 25 biggest stocks) purely on stock rotation,” he says. The fund is underweight financials. However, the likes of Goldman Sachs, Merrill Lynch and Citigroup are among the top holdings. “Our line is that equities will continue to do well. So we leverage that with stakes in financials orientated towards capital markets. There is also a slice of Bank of New York, which processes mutual funds,” says the manager. Microsoft is the biggest holding of all, at 4.5% of the fund. Raschkowan is not scared of IT despite the bubble bursting four years ago: “Microsoft is the nearest thing to an investable monopoly. It has superb pricing power. I’m also fond of Cisco – it is strong in telecoms, and telcos such as Deutsche Telekom are starting to spend again.” The fund manager expects the Fed to take interest rates higher this year to meet the growth expectations. “You have to be sensitive to this. I think utilities are a waste of time and we hold none in this fund. And if interest rates rise, as they will, there is little point in big holdings in either consumer staples such as food, supermarkets and tobacco, or consumer discretionaries such as cars. The fund sold out of Home Depot and took profits in Federated Department Stores.” American Growth is purely research-driven, looking for basics such as quality management and growth prospects that are not already priced into the valuation. So what has Raschkowan and team done well – and not so well? “On the plus side, I increased holdings in mid-caps at the right time. They offered attractive values in cyclical stocks. And we held our nerve on the oil and gas industry. We took a far more optimistic view of energy pricing than others. We were right, but the rest of the market ignored this so much it hurt. But now energy is at the market forefront – sticking with it was tough; now it is vindicated. “We should, however, have been more aggressive on technology. Despite what happened with the bubble, the IT sector has doubled over 10 years and UK investors can only really get significant exposure to this via the US market. We only bought the crème de la crème stocks. We did not anticipate how rapidly prices would go up,” he says. There are no fixed points in financial markets. But the US does have elections in November. “I think Bush’s record on employment growth will see him back in the White House. But if the Democrats do win, it will be negative for healthcare in particular and for capital markets, as a Democrat president could roll back tax cuts and increase taxes on capital gains,” he forecasts.