The JPMorgan American investment trust outperformed its sector with a zero weighting in commodities and a large exposure to American technology, says Garrett Fish, the manager.
The dollar has risen by 8% against the euro since its lows in April. Sterling has fallen back sharply against the greenback. Asian currencies are looking fragile against the dollar. Are these tectonic currency shifts telling us where we should be putting our cash?
Predicting that sterling would fall against the dollar has been a bit like predicting that Usain Bolt will win the 100m. It has not been ‘if’ but by how much?
My guess is that sterling weakness is with us for the medium term. The dollar’s relative value against a basket of global currencies fell to its lowest level for 40 years in April, and it’s going to take time for that undervaluation to unwind.
So which American assets should you buy? If you are looking for safety (in large caps) and security (in the form of a manager with credentials), then JPMorgan’s American investment trust takes a lot of beating.
It’s top of its sector, with a gain of 3.8% over the past year. Over that same period, the Dow Jones has fallen from 13,300 to 11,400. Yes, dollar strength has helped the trust’s manager, Garrett Fish, but he has had to contend with a pretty strong headwind to keep the fund in positive territory.
He describes himself as a relatively old-fashioned fund manager. He doesn’t like to be pigeon-holed into ‘growth’ or ‘value’. “I think of myself as a professional shopper. I don’t want to buy at retail prices. I’m looking for dependable franchises. And what I say I want to do and what I do are similar, unlike a lot of other managers.”
He points to turnover in the fund, which has generally been 25-30% a year. “I tend to take an 18-month to two-year view on a stock,” he says.
With more than 200 stocks in the fund, JPMorgan American could be accused of being a tracker. But it’s an accusation that Fish says is nonsense. “About 130 of the stocks are small caps, which make up just 6% of the fund. Large caps make up 79%. You have to remember that unlike the FTSE, the S&P 500 is broadly diversified.”
Fish took an early bet against commodities, taking a zero weighting in the sector, which initially hurt performance, but in the past month has started to come through.
Like many other managers, he was concerned about a commodity bubble, although he has an interesting take on the demand side of the equation.
He says a large portion of emerging market demand is fake. That’s because countries such as India, Indonesia and Malaysia have used government subsidies to artificially depress prices for basic goods, thus ensuring demand remains high. But it’s a game you can only play for so long. At one point Malaysia was spending about 6% of its GDP on subsidies. Once the subsidies are removed, the true level of emerging market demand may be less dramatic.
American technology firms are Fish’s big overweight, making up 20% of the fund, compared with 14% in the index. He likes IBM, Oracle Hewlett Packard and Microsoft. IBM has been a terrific performer, rising from $97 (£52) in January to a recent high of $130.
Oracle has followed a similar path, although Microsoft and HP have been less impressive. Microsoft is trading at about $27, compared with $37 last November. Fish also regrets not taking a larger stake in Apple, which is about $175 from $120 in January.
Fish sees his holding in Mastercard – the seventh-largest stock in the fund – as a tech holding rather than financial services. “Mastercard has nothing to do with foreclosures or credit problems. All it does is data processing. It has been a big overweight in the fund and has performed well since IPO [initial public offering].”
Mastercard has pulled back from its $320 high in May to about $245, but is still up on the $140 levels it was trading on a year ago.
Deducting Mastercard from his financial services weighting makes him, overall, underweight in the sector.
Fish says he has “no idea” about where the next credit bombshell may come from, which is why he remains low in the sector. Where he is in financials, it is in the insurance sector.
His longest standing overweight has been in defence and aerospace, largely through holdings in Lockheed Martin and General Dynamics. Both have performed well during the Bush era, but under Barack Obama they are starting to look less attractiveFish’s other big aerospace holding, Boeing, has had a poor run, the victim of speculation that an Obama presidency will cut into earnings for many military contractors by reducing funding for large weapon platforms.
Gearing on the fund is low. In early 2003, the trust took its gearing up to 120% to benefit from ultra-low prices. Today, Fish is not so sure we are at such an inflexion point.
“Last year, we were at 97% – in other words we were 3% net cash. Now we are at 105%. It’s not saying batten down the hatches, but neither is it saying bull market.
“That said, every time consumer confidence has fallen to the levels that it is at, then equity markets have been higher in the following 12-18 months.”
Recently, a former International Monetary Fund chief economist was predicting a further leg down in the crunch, with the possibility of a large bank collapsing.
But Fish reckons American capitalism is swift and brutal in dealing with crises. America is not Japan in the 1990s. “We know the problems and we’re starting to come up with the solutions.”
It’s a choice of words that seems a million miles away from the economic gloom enveloping Europe. British investors rotating out of emerging markets would do well to switch back into the original monster-sized emerging market – America.