In the mid-1980s, when sterling was at similar levels against the dollar as today, the Dow Jones Industrial Average and FTSE 100 indices were numerically about the same. Now, the former is 2.7 times the latter. As a result of this outperformance, US equities now make up over half of global equity indices, while the UK's share has dwindled to well below 10%.
Any investor without a chunky exposure to the US has missed out, and while there are always Jeremiahs arguing that US outperformance has gone too far, the long-term trend looks unlikely to change.
The US has economic, political and social advantages that give its market a head start, but, more importantly, it also has great companies: from long established but still dynamic names such as Coca-Cola and Disney to more recent upstarts such as Google (now Alphabet) and Facebook. No other market has such a profusion of large companies that have, thanks to the US capacity for innovation, so quickly come from nowhere to become global giants.
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The good news for investors is that there is no shortage of US-only funds. The bad news is that nearly all the actively managed funds struggle consistently to beat the indices. A good alternative way to keep your US exposure up is to combine some global equity funds with US-heavy sector specialists, such as those devoted to technology and health care, and a low-cost S&P 500 index-tracker or exchange-traded fund.
Personally, I generally prefer investment trusts, as they tend to outperform open-end funds. Although the choice here is limited, there are a few options. The sector giant, JP Morgan American Trust (LSE: JAM), has £1bn of assets and a long-term track record, but has fallen behind the S&P 500 in recent years (by 6% over one year and 20% over five years), despite having a moderate amount of inexpensive debt to boost returns.
The shares trade at an ungenerous discount to net asset value (NAV) of a little below 5%. At least the expenses, at 0.62% annualised, are low. More than 40% of the portfolio is invested in the growth sectors of IT and health care, but perhaps not in the best stocks; Apple and Microsoft, the two largest holdings, each make up over 5% of the portfolio.
It's also worth looking at JP Morgan American's sister trust, JP Morgan US Smaller Companies (LSE: JUSC). (For full disclosure, I own both these trusts.) As the name implies, it doesn't own the familiar household names of corporate America. Only 18% of the portfolio is in technology and health care, with over 20% in financial services, so it looks less growth-orientated.
However, after a strong first half of 2016, its performance over one and five years is ahead of the S&P 500. If this continues, the discount to NAV (currently 13%) should fall, or even reverse; the trust was trading at a premium only a few years ago.
In general, smaller companies in the US don't outperform larger companies as reliably as they do in other markets. But after a period of under-performance, analysts are becoming increasingly confident. The trust's manager, Don San Jose, has beaten the Russell 2000 Smaller Companies index by over 5% (annualised) over the last five years. He has been using periodic market setbacks to raise investment exposure, pushing borrowings towards 10% of net assets.
While professional investors are sitting on their hands, busy worrying about the implications of November's presidential election and what the Federal Reserve will do to interest rates, this looks like a fund well worth tucking away for the long term.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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