Richard Romer-Lee: Land of opportunity?

In his timeless masterpiece “Where Are The Customers’ Yachts?” first published in 1940, Fred Schwed devoted sections to people’s “passion for prophecy” and “the validity of financial predictions”, and his conclusion was to be unimpressed with both.

The most interesting view I heard on a recent trip to New York was from Nancy Lazar, a much feted economist, with the highly rated International Strategy & Investment. She said that actually the USA will once again become competitive in global manufacturing, following a period of restructuring or rather controlling costs within sector, having spent the past 40 years or so in an uncompetitive state.

She cited the 1970s with spiralling inflation, high wages and strong unions as the start of this period, followed by 30 years of competing with emerging markets and China in particular, increasingly so in the last 10 years. She quoted the Boston Consulting Group, which reckons after adjustments are made for America’s greater productivity efficiencies, wage rates in Chinese cities such as Shanghai are only 30 per cent cheaper than in the US. When you also account for inventory and shipping costs the total cost advantage drops to single digits.

Thus the competitive advantage for many of the emerging markets is less clear. Add in the challenge of emerging markets having to control inflation and global uncertainty, the opposing forces that are US patriotism, America’s fabled levels of innovation and demographic tailwinds could see them through.

Challenges

Many investors in the UK acknowledge how difficult it is to beat the US market, particularly the S&P 500.

Presumably the lack of credible managers that do so consistently is the reason why so many fund managers there offer products targeting market cap or style biased funds.

That is a topic for another day. These investors favour a strategy of getting market exposure through passive vehicles and then seek the value add (or alpha as this jargon-filled industry calls it) through stockpicking funds, often in mid-cap and smaller companies. Witness the success of the likes of Findlay Park and Schroders.

That being the case, there can be fewer better funds to tap into America’s creative and more promising corporations than those managed by Jenny Jones and her team, based in New York. They manage the Schroder US Smaller Companies and Schroder US Mid Cap funds, the former focusing on companies with a market capitalisation below $2bn (£1.3bn), the latter on companies with a market capitalisation of between $1bn and $7bn.

Ms Jones also eschews macroeconomic forecasting, although says it is important to have a handle on the economic environment in which companies are trading in order to have a context within which to pick stocks. Their focus, though, is firmly on bottom-up qualitative and quantitative research seeking to identify companies which will generate higher than average returns on invested capital and will deliver their funds’ objectives by producing performance in excess of their benchmark indices over the longer term.