THAT the world's biggest investment market has become a contrarian punt seems typical of these unpredictable times. Traditionally a safe market, North America has become one of the riskier areas in which to invest over recent years.
But while taking risks in markets more typically associated with volatility – such as the emerging markets and smaller companies sectors – has largely been rewarded, the fruits of investing in US companies have been sparse.
Dominated by the US, N
orth America is the world's biggest market, with hundreds of world-leading stocks from which to choose. While this should make the sector a land of opportunity, in reality the average North American fund performance has fallen well short of virtually every other sector.
Over both three and five years, the North America sector – which includes countries including Canada but is primarily comprised of US securities – ranks 26 of 29 investment management association sectors, with average growth of 3.9 per cent and 15.5 per cent respectively. This compares poorly with the 20.3 per cent and 60.3 per cent average return from UK All Companies funds over three and five years, and 87 per cent and 199 per cent from funds investing in emerging markets.
Given the economic travails of the US, it's not surprising that markets have been depressed.
"When there's any major problem in the global economy, people traditionally look to the US for guidance," said Meera Patel, senior fund analyst at Hargreaves Lansdown. "But the credit crunch has made it a market no one wants to touch and it has become a contrarian bet."
The last year in particular has seen the US economy lurch towards recession, and therefore many previously well-regarded funds have massively underperformed, according to Ken Taylor, director of Nairn-based Mackenzie Taylor Wealth Management
"The explanation for such dramatic variations in performance can be found in appreciating that financials account for a significant portion of the 'value' universe, and such a style has been hammered over the past year in particular," Taylor explained. "The big winner of late has been energy, which is more commonly found in growth portfolios."
However, this doesn't mean that from the investment point of view, there aren't some good opportunities to be taken.
The key for UK investors is the currency. While the weak dollar means investors can buy at bargain prices, it's detracted significantly from performance and has been a major factor in the low returns on offer to UK investors.
"The dollar has been a huge headwind for sterling and euro investors," according to Tom Walker, manager of the Martin Currie North American fund. "But that trend is not likely to stay for the next five years because sterling looks overvalued."
The present dollar weakness could offer investors a twin tonic when the upturn arrives, as any glimmer of hope in the economic picture will boost markets and strengthen the dollar against the pound and the euro. It's also possible that the US is further along the economic cycle than the UK, suggesting that an upturn in fortunes may announce itself there first.
"The subprime crisis began in the US and there have been some dramatic price falls in some areas," said Juliet Schooling, investment research manager at Chelsea Financial Services. "In that sense the US is further down the line than Europe and the UK, while US corporates can be very ruthless in a downturn, so recovery from a crisis can be quite quick."
Taylor agreed, adding that investors shouldn't assume that the economic downturn is always reflected in company performance.
"Plenty of US companies are growing their profits and dividends to shareholders, despite the enduring slowdown and house market woes," said Taylor. "Indeed, the contrarian investor is known to be buying in the current climate and history shows that many great purchases are made when everything feels wrong."
Investors can look forward to the US presidential run-off in November, as history shows that share prices respond positively to elections.
According to Capital Economics, since 1897 the Dow Jones industrial average has grown by an average of 9 per cent in election years, compared with an average hike in non-election years of 7 per cent.
A flight to caution in turbulent global markets could also prompt a return to favour of North American funds, believes Walker.
"There has been a huge risk appetite in the last five years and developed markets have struggled against racier sectors, particularly emerging markets. However, that appetite has taken a knock on the head in recent months and we're seeing more asset allocation switches into North America."
On the face of it, North America should be a fertile playground for fund managers, but it's a difficult market in which to find the anomalies that offer the best growth opportunities. "You could argue that the US market has become too efficient," said Patel. "The S&P 500 is made up largely of companies of over £50 billion market cap, so it's very liquid and it requires a lot for prices to move. This makes it harder for managers to identify the catalysts."
Walker's Martin Currie North American fund has a bias towards US companies with a broad global presence. "We believe in globalisation so we go for global companies that happen to be based in the US. The US economy is slowing more than the global economy so the global focus makes sense."
According to Sebastian Radcliffe, manager of the Jupiter North American Income fund, the biggest problems are in the financial and consumer sectors.
"Outside the financial and consumer-related sectors, balance sheets remain in good shape and companies exposed to emerging market infrastructure construction in particular are benefiting from robust demand," said Radcliffe. "Therefore, we believe the current market weakness offers plenty of opportunities to invest in high quality companies at low valuations."
Walker agreed that exposure to financials could be detrimental to performance.
"Being underweight in banks is a key reason for our performance in the last few months," he claimed. "We've focused more on global sectors where the US has leadership, such as technology and oil services."
Research by Standard & Poor's supported Walker's point. According to Alison Cratchley, associate director of fund services at S&P, sector calls have been the difference between successful funds and underperforming ones in the last few months.
"One of the top performers had a third of its portfolio in technology, and the technology sector rose 14 per cent in the three months to the end of May. But financials have been a recipe for disaster and those with heavy weightings in that sector have suffered for it."
This reinforces the need for Investors to do their research and be as selective as fund managers if they are to enjoy positive exposure to North America.
"It really is about picking the right managers," said Patel. "For example, while the Martin Currie North American fund is up 29 per cent over three years, Legg Mason US Equity is down by the same amount over the period."
If you're optimistic that the US could emerge from its slump sooner rather than later, it could be worth looking at funds investing in small and medium sized companies, which tend to lead recoveries.
Patel recommended the Schroder US Small and Mid Cap fund, run by the highly regarded Jenny Jones.
If you're less optimistic about the outlook – like some US fund managers who believe the housing market could take years to recover – but want some exposure to what is still the world's biggest market, global funds – including those of the multi-manager variety – are another option.
Although it's always essential to invest with a long-term attitude, this is particularly pertinent to North America.
"The Fed has been proactive in creating fiscal stimulus," said Walker. "However, consumers feel dented by high commodity prices and they are struggling to provide impetus in the economic recovery. So there will only be a gentle recovery, not a sharp rebound."
The full article contains 1342 words and appears in The Scotsman newspaper.
