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North America sector

North America sector

Funds which invest predominantly in the shares of North American companies. Most place an emphasis on capital growth, but some also aim to generate income.

Richard Troue - Head of Investment Analysis
01 November 2016

  • Donald Trump’s shock victory in the US presidential election initially had a limited impact on the stock market. Share prices made modest gains as hopes the President-elect would introduce a pro-business agenda blunted earlier concerns about his win. Investors shifted to focus on his priorities, including tax cuts, an increase in defence and infrastructure spending, and bank deregulation.
  • The structure of the US political system limits President-elect Trump’s ability to carry out some of his more controversial ideas. Presidents can do little without the agreement of Congress. Over the medium to long-term, much will depend on how the relationship between the President and Congress develops, and the speed with which political divides can be resolved.
  • The US economy is currently in reasonable health. Inflation and unemployment are low, while many consumers and businesses have received a boost from lower energy and commodity prices. We expect to see some volatility over the coming year in light of Donald Trump’s victory, but we do not see an imminent catalyst for a significant reversal in fortune for US shares.
  • The US stock market, as measured by the S&P 500 Index, grew by 2.6% in the year to November 2016. However, the pound weakened significantly against the dollar, which boosted returns for UK-based investors, and the index grew by 29.5% in GBP terms. The Russell 2000 Index of US smaller companies grew by 27.3% over the same period in sterling terms.

Stock market & sector performance - year to November 2016

Past performance is not a guide to the future. Source: Lipper IM to 01/11/2016

Our view

The US is the world’s largest economy as well as its largest stock market. The country is home to many global businesses which dominate their field and overall the US accounts for almost half the global stock market.

It is simply too big a call to omit such a dynamic and innovative economy from consideration. Most diversified portfolios should contain at least some exposure to the US market. However, it is one of the most heavily researched markets in the world. Share prices are extraordinarily quick to react to new information and this efficiency means it is difficult, although not impossible, for active fund managers to consistently unearth overlooked opportunities or gain an edge over fellow investors.

For exposure to larger US companies we feel a low-cost passively-managed fund could be considered. We continue to seek US fund managers with the potential to perform well over the long term, but currently believe there are more opportunities for active fund managers to add value among higher risk smaller and medium-sized companies. This is therefore where our Wealth 150 exposure is concentrated.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

The US stock market has recovered phenomenally well from the 2007/08 financial crisis. The S&P 500 closed at a low of 676.5 on 09 March 2009 and has since rebounded to 2111.7, as at 01 November 2016. Once currency moves and dividends are factored in the market has grown by 313.2% in sterling terms.

Over the past five years the US has been the best-performing major market for UK-based investors. Healthcare and consumer-focused companies have performed well over this period, to the benefit of funds with significant exposure. In contrast, mining and resources companies have performed relatively poorly. They faced a perfect storm of high costs and lower earnings as commodity prices fell sharply.

Performance of the US companies over 5 years (GBP, dividends reinvested)

Source: Lipper IM to 01/11/2016. Past performance is not a guide to future returns.


The past year has seen resources companies fare better as commodity prices have rebounded, but their share prices remain some way off their peak. By and large investors have continued to favour companies with dependable earnings and those perceived to have superior growth potential, even when the going gets tough.

In recent years growth in company earnings has not kept pace with rising share prices and the stock market has started to look overvalued, according to our analysis. We believe company earnings drive share prices over the long term. If the earnings growth implied by current share prices fails to materialise we believe investors could be in for disappointment. There is a risk share prices could fall to reflect the more sombre earnings backdrop.

Some commentators claim ‘this time is different’ for the US market. The glass half-full argument suggests the US is home to exciting technology companies, such as Apple, Alphabet (Google), Facebook and Tesla. They have become global icons with very few, if any, serious competitors. The potential to maintain and increase profits could justify their share prices climbing ever higher. Or so the argument goes.

Similarly, some consumer-focused companies have performed well. Even though this is a competitive sector the US is home to world-leaders such as Nike, Disney, Visa and Dr Pepper Snapple. Their potential to generate recurring revenue and remain popular, even in a low-growth world, is often cited as reason to remain positive.

The counter argument is that earnings don’t rise forever and the share prices of some companies suggest there is little margin for error.

Outlook

We think investors should tread with caution when it comes to the US stock market. On valuation grounds it does not look especially attractive, but this is not to say the market should be avoided entirely, or returns will be poor. An expensive market can continue to perform well, just as a cheap market can fall further.

As noted previously, the US is an important and innovative market with many successful companies. Under a Donald Trump presidency there has been speculation banks could perform well if he carries though with his promise to relax financial regulation. Similarly, defence and infrastructure companies could benefit if government spending is increased, but companies reliant on foreign trade could be hit if trade barriers come into effect.

While it can be argued companies face elevated political and economic risk under a Trump presidency, it is rare there is not something to worry about at an economic level. Over shorter periods economies falter, governments change, and regulation slows progress. On a smaller scale company management team's change and obsolescence is an ever-present threat. The pendulum of investor sentiment can also swing wildly between euphoria and despair.

Over long periods of time we continue to expect human ingenuity to prevail. Determination, persistence and simple hard work helps companies create goods and service people want to pay for and use. Over time knowledge improves, innovation fuels change and technology drives efficiency. This helps them grow earnings and in turn this drives rising share prices.

We believe the stock market is an excellent home for long-term investments and for many investors this could include some exposure to the shares of US companies. We don’t feel there is currently a compelling case to aggressively increase exposure and would favour taking profits when the market does well to rotate into areas which offer greater value.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Five year performance

  • IA North America sector

    +125.87%

Data correct as at 01/11/16. Please remember past performance is not a guide to future returns.

Fund reviews

We undertake a comprehensive review of every sector. Here we provide comments on a selection of funds of interest following our most recent North America sector review. They are provided for your interest but are not a guide to how you should invest. If you are unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at November 2016. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

There is a tiered charge to hold funds in the Vantage Service with a maximum of 0.45% p.a. - view our charges.

Wealth 150 Fund reviews

Source for performance figures: Financial Express

This fund aims to track the performance of the FTSE USA Index, a broad index of around 650 large and medium-sized American companies.

Legal & General are one of the most conservative tracker fund managers. Almost all funds are fully physically replicated - meaning they buy every stock in the index. This allows them to track the index precisely. Indeed, the fund has tracked the index tightly and efficiently over both the short and longer term and it has lost little value due to annual charges. We continue to believe this fund is a good option for low-cost exposure to the US stock market.

The manager targets large and medium-sized companies in good financial health, with high-quality management teams, and the potential for superior revenue growth.

Stephen Kelly’s search for companies with excellent growth prospects has led to a bias towards technology companies. Alphabet, Amazon, Apple and Facebook all currently feature among the fund’s largest investments, for example. Some technology and healthcare investments have held back performance during 2016, but long-term performance is respectable.

The fund managers invest in companies with exceptional business models and hold them for the long term. They believe superior businesses that deliver on their growth potential will ultimately be rewarded with a higher share price.

The managers look for real long-term changes that businesses can take advantage of. This includes themes such as the increasing importance of the internet and China’s re-emergence as an economic superpower. The fund’s largest investments include Amazon, Alphabet, Tesla Motors and Facebook. This is a concentrated portfolio so each investment can contribute significantly to performance, but it is higher risk. The fund’s recent performance has been good.

This fund focuses on companies the manager expects to achieve above average growth in earnings. As well as a growth-focused approach there is a bias to smaller and medium-sized companies, which are higher risk.

Aditya Khowala took over management of this fund in September 2015. It has been a tough start and the fund has underperformed the S&P 500 Index and the average fund in the sector so far. This is only over a short period though and we feel it is too early to judge the manager.

The manager seeks out of favour companies, including those recovering from hard times, where he believes prospects are not being appreciated by other investors. There is a focus on value and larger companies.

An emphasis is placed on resilient business models and companies in good financial health. There is currently a bias to technology companies and those in the industrials sector. Angel Agudo has done a good job since taking over management of this fund in December 2012, but we would like to see a longer track record of success before considering the fund for the Wealth 150.

The manager looks for companies able to deliver sustainable dividends and some capital growth. She aims to invest in those where the share price is low compared with earnings growth prospects. It is a value-biased approach with an emphasis on larger companies.

Clare Hart favours high-quality management teams with a track record of allocating the capital invested in a business wisely. There is currently a bias towards financial companies, including Wells Fargo and BlackRock. The fund has delivered good returns in recent years. It has performed better than the average fund in its sector, but has not kept pace with the rise in the S&P 500 Index since launch in December 2008.

The manager targets larger companies with the potential to grow dividends over time. There tends to be a blend of attractively-valued companies and those with the potential for impressive growth.

John Weavers took over this fund in April 2015 with the aim to turn performance around. He believes focusing on dividends instils discipline in company management. If they commit to paying sustainable and rising dividends they are less likely to fritter cash generated by the business on uneconomic growth or unnecessary acquisitions. The manager has delivered better performance than the average fund in the sector so far, but it remains early days.

There is an emphasis on larger companies with the potential for impressive revenue and profit growth, particularly those able to earn sustainable returns on the capital invested in the business.

This fund has seen a number of changes in management, most recently when Robin Milway took over as lead manager in September 2016. We believe it is too early to judge the manager’s abilities. There is currently exposure to technology and consumer companies, such as Microsoft, Apple and Home Depot.

The manager aims to invest in smaller and medium-sized businesses in robust financial health and with growth potential that is being overlooked by other investors. Please note smaller companies are higher risk.

The fund has risen in value in recent years, but not to the same extent as its benchmark and other funds in the sector. This is disappointing, but we believe the manager has the potential to turn performance around over the long term. Indeed, the fund’s exposure to more economically-sensitive areas of the market, including a number of electronic equipment businesses and companies that rely on consumer discretionary spending, have helped returns over the course of 2016. The manager feels a shift in investor sentiment towards this type of company, and away from more traditionally-defensive sectors, could continue to benefit the fund.

The manager combines three different types of medium-sized company into a diversified portfolio: those she thinks are expected to deliver steady growth year after year, those with growth potential not factored into the share price, and those undergoing a turnaround.

Jenny Jones is a highly experienced investor and performance over the past few years has generally been good. The fund’s focus on medium-sized companies means it could offer diversification and dovetail well with funds focused on larger US companies.

Latest research updates

  • Fund manager Lauren Romeo has not changed her investment approach since Donald Trump’s election victory
  • The manager continues to seek good-quality companies trading below their true worth
  • She believes Trump will have some positive impact on the US economy as he is seen as pro-business

Our view

Lauren Romeo, manager of the Legg Mason IF Royce US Smaller Companies Fund, seeks good quality companies. They should be in a strong financial position, with little or no debt and a track record of making a good return on the capital invested in the business. She aims to invest when these qualities are not being appreciated by other investors and the company is valued below its true worth. It is an approach we favour and the fund retains its place on the Wealth 150 list of our favourite funds across the major sectors.

Lauren Romeo remains optimistic in her outlook and we feel the long-term prospects for this fund are positive. The manager is part of a well-resourced team with a long and impressive track record of generating strong returns for investors. We are also encouraged to see an improvement in the performance of the fund after a couple of tough years, though as always past performance is not a guide to future returns. In our view this fund provides investors with an excellent opportunity to gain access to the exciting long-term growth potential of US smaller companies. Please note, smaller companies tend to be higher risk than their larger counterparts.

Fund review

Donald Trump’s surprise US election win last November was followed by initial sharp falls in stock markets across the world. The falls were relatively short-lived with the US market closing higher when it became clear Trump had been victorious. Despite some of his more controversial ideas the new President is broadly seen as pro-business, with the aim to boost America’s growth.

It is too early to tell exactly what his presidency will bring, but Lauren Romeo is optimistic on his ability to have some positive impact on the US economy. That said, she doesn’t make investment decisions based on the economic or political outlook; and her investment approach will not change under a Trump presidency.

In recent years the manager's ‘value’ style of investing has been out of favour. Instead investors have favoured ‘growth’ companies that have more stable and predictable growth prospects. Similarly, indebted companies have performed well as the low interest rate environment has allowed them to service debts at ever cheaper rates; companies that Lauren Romeo generally does not invest in. However the manager’s value style came back in to favour in the latter part of the year.

In 2016 the fund’s bias to the industrials and IT sectors boosted performance. SAIA, an interstate trucking company, and Mentor Graphics, a multinational supplier of electronic design automation tools performed particularly strongly. The fund has limited exposure to biotech and healthcare stocks because the manager feels these are speculative investments, with small companies in this sector producing lower revenues. Low exposure to this sector proved beneficial over the last 12 months as the sector fell sharply over fears Hillary Clinton, if elected would introduce drug price regulation.

The fund’s investments in the financial sector, consisting largely of asset management companies including Lazard, dragged on performance. The manager retains her conviction in these investments and feels that their current share prices are not reflective of their true value. For instance, Lazard has significantly improved its cash flow, something the manager feels the market is yet to recognise. Donald Trump is also expected to ease regulation, which could benefit the sector.

Annual Percentage Growth
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Legg Mason IF Royce US Smaller Companies 4.6 26.6 6.6 -7.3 50.1
Russell 2000 11.2 36.2 11.4 1.1 44.7
IA North American Smaller Companies 7.5 36.4 9.6 2.5 39.9

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2016

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

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