Making a ‘special relationship’ work

America’s symbiotic relationship with China and investment in technology companies make it a good prospect for skilled investors, despite the volatile performance of funds in the sector.

David Cameron’s visit to America was all about reinforcing the “special relationship” between America and Britain. What it also did was to throw into focus the differences between us, particularly so far as recent economic progress is concerned. While America was arguably at the core of the financial crisis that brought about the economic slowdown and highlighted the vulnerability of the developed world to the size of their borrowings, their approach to managing their way out of the problem has been different to that adopted by Europe, including Britain.

The slowdown in the American economy, driven by the rapid downturn in the housing market, was addressed less by austerity than stimulation. There are those that would argue that only an economy as large as that of America could afford to take such an approach. To avoid facing the problems that over indebtedness creates, you need willing buyers of government paper which, as the only remaining super power, America has been able to keep on side.

And one of the biggest buyers has been the Chinese government. They appreciate that for their economic momentum to be sustained, a healthy American economy is crucial.

Moreover, their trade account is in surplus, throwing up cash faster than they can spend it to improve the country’s infrastructure. So they are content to help prop up the world’s largest consumer and thus protect one of their most important markets.

But keeping the American economy growing has not just been a case of back scratching. Investment in high technology industries has continued to pay enormous dividends, with Apple becoming the world’s most valuable company in terms of market capitalisation and Microsoft continuing to hold on to its premier position as a software provider. Then there are Google, Dell and Facebook, even. American ingenuity has helped sustain an economy ravaged by excessive credit. (Trends continues below)

This has all helped shares in America outperform many of the world’s other leading markets, including those of countries with better intrinsic growth prospects and, indeed, performance. While we struggle to regain the ground achieved just ahead of the Lehman Brothers debacle, Wall Street has seen shares move ahead. Investors ignore America at their peril. Finding the best way to gain exposure to this bastion of capitalisation is another matter altogether, though.

”American ingenuity has helped sustain an economy ravaged by excessive credit”

Of all the performance tables, North America must surely be one of the most erratic. Only one of the top five over the past six months appears in earlier leading positions – and then just once. Indeed, just four funds have registered twice in the four time frames reviewed. None have appeared more frequently.

There is a limited selection of funds from which to choose, if it is to the broadly drawn category of North America to which you are lured. While 85 – the number of funds listed in the IMA North American sector – is hardly small, there are plenty of other sectors with a wider choice. All but 18 of these funds have been around for five years. And some of the performances achieved have been stellar. But true consistency is harder to find.

Number one over three and five years, Janus US All Cap Growth, slips to fourth quartile over one year and has only just scraped back into the third quartile over six months. Neptune, which with its US Max Alpha was in the top 10 over three years (its track record does not extend back over five), finds itself propping up the tables over six months with a rise in value of just 6.5%, compared with a 20% gain from the leader, Greenwich, and an average for the sector of close to 15% up. Similarly, their US Opportunities fund is tail end Charlie over three years, yet ranks 10th out of 67 for five. Shorter time frames will find it languishing in the third and fourth quartile.

This is a huge, well researched and generally efficient market, so perhaps we should be reassured to discover that no single manager or funds group seems capable of holding the top spot indefinitely. Even the home teams demonstrate a mixed display of performance skills, with Fidelity, Franklin and BlackRock all finding consistency hard to achieve. Even Vanguard’s Equity Index tracker can do no better than 47th out of 85 over six months and 38th over one year, which does at least lift it from third to second quartile.

For the investor – and indeed for advisers – making the right choice is as difficult here as anywhere. But leaving America out of a portfolio designed to deliver long-term growth still looks a dangerous ploy. America has been put aside in the past, perhaps most notably in the mid 1990s, when Asia was all the rage. It cost investors dearly then, with Asian markets suffering their own credit crunch and America achieving a dominant position in technology. The outlook is unclear, but resource rich America could well find itself far better placed than many as emerging nations continue to demand more. This remains a sector to retain on a buy list.