Save, make, understand money

Experienced Investor

Against the tide: Expert investors underweight record-breaking US

Dan Jones
Written By:
Dan Jones

Last week, the US benchmark index, the S&P 500 soared past the 2,000 mark for the first time, surprising those who had expected a reversal of some of the 30% gain seen in 2013.

Global equity managers have been loath to underweight the region in light of continued strong performance which has seen the S&P climb 8% year-to-date (as of 27 August).

Almost two-thirds of active managers in the IMA Global sector – where managers have flexibility to invest anywhere in the world – have 40% or more of their portfolios in US and Canadian stocks, with the majority neutral or overweight the 50% index weighting, according to FE data.

Multi-managers, however, are taking a different tack: high profile buyers including Old Mutual’s John Ventre, and Schroders’ Marcus Brookes now say the US is too expensive compared with other regions.

Better indicators

Managers warn the index only looks inexpensive on the surface: although the S&P’s forward price to earnings (P/E) ratio of 16.75 times earnings is not particularly pricey relative to history, they suggest other metrics are less favourable.

“The US looks OK on a crude measure like price/earnings, but there are better indicators, such as price to book, and enterprise value to EBITDA – and these are typically mean-reverting indicators,” Ventre said.

This view is backed by PSigma IM CIO Tom Becket: “Most people look at forward P/Es and try to make bullish projections around that, which is all well and good as long as you have certainty of earnings.

“But companies have already made easy gains via restructuring. Now they have to focus on profitability, and there are still questions over that.”

Ventre said he has been increasing his Old Mutual funds’ underweight to the US as the rally continues, and others are also drastically underweight: Becket is running at half the index weight, and the likes of Premier’s Simon Evan-Cook, and F&C’s Gary Potter and Rob Burdett are holding little more than 10% in the country.

But with US equities continuing to surprise this year, the catalyst for a shift in sentiment remains uncertain. Becket pointed to a peak in the trend of corporates boosting share prices by issuing cheap debt to fund buybacks, while Ventre suggested macroeconomic events could be the trigger.

“Historically, the early part of the rate cycle has not been that bad for markets, but these hikes are coming much later in the cycle than they have previously.”

Gentle slide?

Evan-Cook, head of multi-asset at Premier, suggests the US may simply now begin a period of relative underperformance.

“I would not be surprised if the US just gets outperformed by other markets. I cannot see where it goes from here unless it gets into one of its crazy phases where it ignores all fundamentals. That is not out of the question, but would defy all logic.”

Selectors say their relative bearishness on the region does not just stem from the infamous difficulty active managers have in beating the index.

But they acknowledged lesser known US equity managers now offer not just a chance to differentiate themselves, but also arguably the best chance of outperforming an expensive market.

As well as perennial favourite Findlay Park, selections include funds from specialists Montag & Caldwell, Harris Associates, and Lapides Asset Management (see box below).

Evan-Cook said: “The US is not a great place for active managers, which is a factor. But if we thought the US was compelling, we would have more exposure, and may even have gone passive.

“The fact is we do not think you need much exposure at all, unless you are following a benchmark.”

The best of a bad situation?

Selectors’ under-the-radar US picks

▶ Tom Becket, PSigma IM

Montag & Caldwell Large Cap Growth fund

▶ Simon Evan-Cook, Premier

Natixis Harris Associates Concentrated US Equity fund

▶ John Ventre, Old Mutual

Segregated mandates from Lapides AM, Wellington, and Cupps Capital

▶ Gary Potter & Rob Burdett, F&C

Conventum Lyrical fund

▶ Marcus Brookes & Robin McDonald, Schroders

Heptagon Yacktman US fund