Knight moves with quiet confidence

From his base in Philadelphia, away from the hubbub of Wall Street, Gartmore US Opportunities manager Gil Knight takes full advantage of his freedom to roam all over the stockmarket.

It is becoming more difficult to “read” America than at perhaps any time in recent history. Politically it is increasingly isolated from the rest of the world on both Iraq and climate change. But economically the twin bogeymen of government debt and household debt look less fearsome by the day.

The economics textbooks say oil at $60 a barrel spells economic recession. But so far the only evidence for this is a slowdown in sales at Wal-Mart, whose lower-income customers are most affected by the price of gasoline.

Elsewhere, Independence Day will be celebrated in a country whose economy is surprisingly buoyant. Given the gloom over personal debt levels and the almost invisible savings ratio, one might assume that profligate Americans would start showing some signs of retail fatigue. Yet there’s no sign of that from the sales figures coming out of the big store operators.

Perhaps they are cutting back on luxuries such as cruise ship holidays? No – if anything, that particular boom seems to just go on and on. Remarkably, there is even a shortage of cruise ship capacity.

But perhaps the key to reading the American economy at the moment is to look at the housing market. America, which has so long looked at Britain’s house price booms with bemusement, is now in the grip of its own bubble.

Nearly one in 10 of the nation’s single-family homes were bought and sold last year, while builders started work on 1.65 million homes in the year to May, the highest number since records began in 1959. And if there is one lesson from the British economy, it’s that you don’t get recessions when the housing market is flourishing. The drawback is that the number of estate agents in America has gone from 400,000 in 1975 to above a million today. There’s a ghastly thought. One million estate agents. Sales of shiny suits must be soaring.

Gil Knight, manager of Gartmore’s 250m US Opportunities fund, has been investing in American equities for over 30 years, and he has a quiet confidence about the robustness of the economy and the continued health of the consumer.

A quiet confidence also emanates from his interview manner, where he comes across more like a Harvard law professor than a Wall Street player. It perhaps helps that he is based in Philadelphia rather than New York.

He has a pragmatism that means he talks stocks rather than strategy. Not attached to any particular creed, he has moved in and out of tech, up and down the market cap scale and criss-crossed from value to growth and back again.

As Standard & Poor’s says: “His style is highly individualistic and does not depend on in-house research support. He has the confidence to act on top-down macroeconomic themes and he will often position the portfolio for a trend well before it is recognised by the market.”

Other fund managers who suffered as a result of the tech bubble make up a “been there, done that, bought the tech stock” grouping too scared to go back in. Not Knight. At one point in early spring 2001, the fund was 65% in technology. Knight had bought Intel and Cisco knowing that tech was really the only way to make money in the late 1990s.

But he sold tech stocks earlier and deeper than most rivals, taking the weighting down to 16%. Now he is back in, with the fund 23% in technology compared with a neutral weighting of 15%. He likes fibre-optics maker Corning and Juniper Networks (a Cisco-style networks company) and has some Microsoft but is not entirely sure about Google.

The approach has paid off. The fund is AA rated by Standard & Poor’s and recouped most of the bear market losses of 2002 with a stunning performance during 2003. Over the past year it has not been quite so sparkling, but it is still 9.6% ahead while the S&P 500 has been languishing.

One of the reasons for the outperformance is the way this fund can go up and down the market capitalisation scale. It has an all-cap mandate, and in the past has typically been biased towards small and mid-cap stocks. During 2003 he swung into small-caps, boosting performance markedly, but today he has gone very much the other way. “Small-cap heaven could happen again, but we are not there yet,” he says in his typically mild-mannered way.

It is the consumer who most excites him at the moment. Knight has 18% in consumer discretionary stocks compared with the 11% they make up of the S&P 500. “In spite of high gasoline prices, the numbers that are coming out of the retailers are very good, and stock performance has been good too. Look at Starwood Hotels. Room rates are booming, and people are travelling.”

It’s the same story at cruise operator Carnival and at Federated Department Stores. “The US economy is almost bound to move ahead given the fact that consumer personal income is rising at a rate of about 7%. The economic growth rate in the US will be 3.6-3.7% this year, compared with the historical trend rate of 3%.”

He is slightly underweight consumer staples and industrials, and has financials at 15% of the fund versus 20% in the S&P 500. Given the excitement generated by Bank of America’s purchase of MBNA, he might have wanted to be more geared to the sector, but he does hold rival credit card operator Capital One.

So what are the blots on the horizon? Knight does enjoy looking at global macroeconomic themes, and the one he worries about is US/China relations (see News Analysis, page 12). There is considerable resentment building up about the purchase of Unocal by CNOOC of China. America is not usually that alarmed about foreign takeovers, but you have to remember that China has its missiles pointed at US forces in Taiwan. Knight says a renminbi revaluation is inevitable, and that it will have to be substantial – at least 10-15%.

Over the longer term he is slightly more ambitious than British managers, who tend to pick a figure between 6% and 8% when asked to predict long-term returns. He sees the American market sustaining returns of up to 10% on a regular basis. Given the dynamism of the American economy, its relatively strongly growing population and dominant big-cap players, he might well be right.