After yet another year of USoutperformance, many investors will be regretting their low exposure to America and wondering how much longer a market which already accounts for more than half of the combined value of global indices can continue to beat the rest of the world. Admittedly, the S&P 500 index measured in sterling only beat the rest of the world by 3% last year. But the margins over the UK and continental European indices were 14% and 11% respectively. Eventually, the tide will turn and the US will lag, but pundits have been wrongly forecasting this for years.
There's no doubt that the US market, trading at a historic multiple of nearly 20 times 2016 earnings, seems expensive relative to other developed markets. But double-digit earnings growth, supported by economic growth above 2%, would reduce the valuation to more attractive levels. Moreover, the US is home to a disproportionate number of world-beating, innovative growth companies that have become global household names. So the US market surely deserves its premium rating.
The good news is that investors don't need to worry about when it is right to raise or reduce their exposure to US stocks. By buying into the higher-quality global funds, they can leave that decision to a manager who can make the judgment based on the relative merits of companies around the globe.
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Baillie Gifford's Scottish Mortgage Investment Trust (LSE: SMT) is, rightly, everybody's favourite in the sector. Manager James Anderson, an evangelist for long-term investment in growth companies, points out that what looks expensive in the short term can, with high rates of growth, quickly become cheap.
Inevitably, US companies account for nearly half of his portfolio. The top-ten holdings, which account for more than half of the trust's assets, include Amazon, Illumina, Tesla and Alphabet (formerly known as Google). It also includes Chinese internet companies Tencent, Baidu and Alibaba. Despite a three-year return of 54%, Scottish Mortgage has one of the lowest expense ratios in the market at 0.45%.
The Mid Wynd International Investment Trust (LSE: MWY) is far less well known, but has performed almost as well as Scottish Mortgage, returning 52% over three years. Artemis snatched this fund from Baillie Gifford in 2014, and it has grown in size to £130m since, but it doesn't yet appear on the radar screens of the big wealth managers.
The portfolio is less concentrated than that of Scottish Mortgage the top-ten holdings accounting for less than 25% of the portfolio. The fund is also less focused on technology. "Online services" account for more than 20% of the portfolio, but this is one of several investment themes that guide the stock-picking process: others include "retiree spending power", "tourism" and "media content".
Exposure to North America, at above 50%, is about the same as for the MSCI World index, but, as with Scottish Mortgage, the portfolio is very different from the MSCI index, and little time is wasted on macro-economic or political issues the focus is on picking stocks rather than asset allocation, with an eye to profiting from long-term change. The expense ratio of 0.7% is a bit higher than at Scottish Mortgage, but still moderate.
What both funds show is that great performance doesn't come from the big investment teams, scripted investment processes and computerised number screening that the investment consultants love but from small, clear-thinking and nimble teams who stand apart from the investment consensus.
In the news this week
Looking at the performance of Neil Woodford's Patient Capital Trust since its launch, it seems the manager is stretching the patience of his followers, says Brian Dennehy on FundExpert.co.uk. Woodford's new fund was designed to represent his best blue-chip ideas in addition to early stage and early growth firms. But "we suggested that you might be better advised to opt for proven funds in each of these two areas", says Dennehy.
If you'd invested in the Liontrust UK Small Companies fund and Schroder Recovery fund in February 2015, you would have made a collective 35%, relative to Patient Capital's loss of 9%. "Woodford deservedly commands huge respect," says Dennehy. "But we see no evidence that this particular offering of his is about to provide better returns than proven alternatives."
The Financial Conduct Authority has put forward proposals to prevent property fund suspensions from happening again during times of stockmarket stress, says Danielle Levy on Citywire.co.uk. Six major property funds suspended trading last summer after a wave of investor redemptions (investors pulling their money out) left managers with insufficient liquid assets to meet the requests.
The regulator has suggested several options for dealing with the problem, including a cap on the proportion of a fund that can be invested in illiquid assets; a restructuring of funds so that private and professional investors do not put money into the same vehicle; and a secondary market whereby investors could sell their shares in the open market.
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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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