America is an important investment component of most portfolios – what happens there is of relevance to investors everywhere. America remains the world’s engine room, counting house and research laboratory, despite its recent dramas.
Because of its size and competitive advantage in large areas of economic activity, this fact is a constant
of global political and economic life.
In terms of financial markets, the $11.6 trillion (£8.1 trillion) of American-listed stocks means that the old saying still holds: “When New York sneezes, London catches a cold.” This time, London is in the doldrums of a violent influenza.
The collapse in American demand has also hit the exporters of erstwhile “safer” physical goods at various stages in the production chain, from Germany to China and from Japan to Italy. Non-banking driven economies are feeling the hard edges of globalisation. The old maxim is even truer this time, even without the catalytic effect of a new president.
Our increased globalised economic interconnections tie us closer together than in the past. Markets are unlikely to find a stable foothold until the American source of much of this instability is seen to be on the mend.
Investor experience of investing in America is vital to creating solid sentiment. American markets were hit as hard as most in local currency terms.
The story is, of course, different for British investors. The decline of sterling has cushioned this fall, as it has for most sectors denominated in foreign currencies. Losses were translated into less dramatic losses, or even profits. The typical British investor in America came away with mild losses.
In the year to the end of January, the Investment Management Association (IMA) North America sector fell by 13.09%, compared with its 46.76% decline in dollar terms.
The IMA North American Smaller Companies sector fell 9.79%, compared with its 44.74% drop in dollar terms. These currency fluctuations make it hard to divine sensible conclusions about fund manager sentiment. It is therefore useful to examine how funds that allocate freely across asset classes and geographies consider American equities.
The Lipper Asset Allocation Analysis Report shows that the IMA Active Managed sector witnessed a reduction in its overseas equities allocations, from 48.9% to 42.8% in the six months to January. This came primarily from the substantial fall in the exposures to emerging market equities, from 6.5% to 2.6% of the average fund in the sector, and to continental European equities, from 15.4% to 14.1%. If we weight those funds by assets under management, European equities had the greatest absolute fall. But they both led the way in the reduction of overseas equity exposure in the sector.
On the other hand, North American exposure in the Active Managed sector was roughly static to positive, and more fund managers began to agree with each other on this investment option. Depending on whether we look at the average (0.7% fall), assets under management-weighted average (0.6% rise), or median (2.3% rise) change, the typical Active Managed fund saw a fairly flat change in North American holdings, but with a slightly positive bias.
It also appears that fund managers in the sector are becoming united in their opinion of North American equities. The standard deviation of North American equity exposure across different funds’ portfolios dropped by 3.8% over six months.
This shows a reduced level of disagreement between Active Managed fund managers about North American equities. This was, in fact, the largest increase in shared opinion seen in the sector across that six-month period. This consensus lack of relative panic regarding North American equities is notable in these times. The typical fund increased its cash positions during the same period, and the most risk-averse Active Managed funds increased their cash holdings even further.
But what are fund managers restricted to investing in the region holding? The themes appear clear from Lipper Portfolio Holding Analysis Reports. On the bearish side, the 3.35% reduction in the portfolio value in healthcare holdings reflects concern about President Obama’s administration’s effect on healthcare corporates. The 1.61% and 1.28% reductions in consumer goods and services sectors, respectively, are self-explanatory, in a climate where consumers are still concerned for their livelihoods, homes and pensions.
The bullish side is an interesting one. Fund managers are either preparing for an upturn or are picking bargains. The greatest increase in exposure was to beaten-up financials, an increase of 2.44%. General financials, banks and life assurance were the focus of this rise. Basic materials saw a 2.17% increase in fund portfolios, focusing on the chemicals sector, while industrials saw a 1.68% allocation increase, with a focus on heavy engineering.
Research shows British fund managers are more likely to hoover up bargains, compared with their American colleagues, who prefer to chase momentum. The shifts above are most likely a value play by most managers. There is one eye on the next upturn and infrastructure expenditure, but British fund managers tend to be contrarian when not overly excited. This would suggest that American equity funds are not out of trouble, but laying the foundations.