Always a dangerous game…

…underestimating the world’s largest stockmarket, that is. And for those wishing to access the US stockmarket, with more than 100 funds in the IMA sector, there is plenty of choice

Given how crucial the US is to the global economy – and bearing in mind, too, that shares there have been performing well recently – it is a little surprising that this important market has not received my attention for some while. Often it is the biggest markets that investors ignore, perhaps in the belief that smaller ponds contain more interesting fishes. But underestimating the world’s largest stockmarket has always been a dangerous game.

Unlike the UK market, the bull run of the mid 2000s saw the S&P 500 Index, generally accepted as the best benchmark for the US equity market, exceed the high it reached at the beginning of 2000. The US market peaked later than the UK’s, reflecting the importance then of technology companies. Remarkably, given the implosion that took place in technology shares as the new millennium got underway, new highs were reached in 2007. These have been breached in recent trading.

Once again US technological expertise is helping the market. While Apple may have fallen from favour recently, Google continues to power on and technology companies are amongst the most valuable in the US stockmarket. In the 1990s, when investors’ focus was very much on the Far East, US shares quietly stormed ahead while Asian markets suffered greatly from the financial crisis that beset them later in the decade.

Recently US shares have been demonstrating that confidence has returned. While cynics might say the strength of the US market owes more to the money created through quantitative easing finding its way into financial assets, the fact is a prolonged recession was avoided and even US house prices are rising again – particularly strongly in the cities. Additionally we are seeing manufacturing capacity returning to the mainland as rising wages in China and higher transportation costs reduce the advantage enjoyed by Asian businesses.

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This is not to say US shares are particularly cheap, though they have not yet risen to the point where valuation levels start to look exposed. Should the Fed reverse its policy, then some consolidation in the market will be inevitable. However, it is worth reflecting on the fact that an end to the cheap money era there would be as a consequence of evidence that the economic recovery was gaining strength – itself an argument for equity investment.

As for accessing this important market, with more than 100 funds in the North American IMA sector, there is plenty of choice. Interestingly, performance between them is not as varied as in, for example, Asian or emerging markets, though the range is still considerable. Legg Mason’s Opportunity fund, part of the Capital Management’s stable, has fought its way up from near the bottom of the tables over three years to top them over six months and one year. The near 50 per cent return over one year contrasts with an average performance of less than plus 19 per cent and a tail end Charlie, Janus US All Cap, that actually lost money for investors – admittedly the only fund that did.

Consistency is a little more difficult to find, though another Legg Mason fund – US Aggressive Growth, which is managed in the ClearBridge operation, Legg Mason’s largest manager – only drops out of the top five once, over one year, when it ranks sixth. The Fleming Family and Partners US All Cap Value Equity fund also stays close to the top, only drifting into second quartile over three years.

Even at the bottom of the tables there is not a great deal of consistency. Threadneedle’s American Extended Alpha fund is third from the bottom over six months, but is first quartile over three years and is actually ranked third over five. In the bottom dozen or so funds in the tables, only one – Legal & General North American – is consistently fourth quartile, but the returns delivered, while below average, are not that wildly adrift of where the bulk of funds are to be found.

The future is, of course, more difficult to determine. The US does have a debt problem, though the sheer size of their economy and the problems that exist elsewhere in the global investment world have kept demand for their sovereign debt high. What could continue to transform America’s prospects is the emergence of shale gas and oil as a cheap and readily available energy source. Some predictions suggest the US will become energy self-sufficient within half a decade, perhaps overtaking Saudi Arabia in oil production not long after.

Whatever the outcome, the world’s largest stockmarket and economy deserves a place in most portfolios. Looking at where and how a fund is invested is important, though, is important. The Legg Mason Opportunity fund, for example, can include derivatives in the portfolio – not a safe choice for all investors. Overlooking the US for the smaller, perceived exciting, emerging markets is unlikely to be a wise decision.

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Brian Tora is a contributor to Fund Strategy