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Best in Class: Fortune favours the brave

Best in Class: Fortune favours the brave

Outlook season is upon us with commentators (myself included) gazing into crystal balls trying to guess which assets will do best and worst in 2017. 

However, with so many uncertainties in the world at the moment, I’m not particularly keen on any.

Others are a little more brave and one area that seems to be popular is the US. Donald Trump will be inaugurated as its 45th president on January 20 and, while his policies are less than clear, the economy was central to his manifesto. 

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He has promised to grow the US economy by 4 per cent per annum and create 25 million jobs. Quite a promise considering the low-growth environment, and the fact the unemployment rate is near cyclical lows and job openings at all-time highs.

That being said, after stubbornly slow wage growth, employees are finally receiving wage increases. Adoption of tighter immigration policies could further drive up the cost of labour and higher wage inflation will be good for the US consumer, a key engine of the US economy.

US company earnings have also been flat for a good two years but Fidelity, for example, is now forecasting aggregate growth of 11.2 per cent in 2017 and return on equity of 16.2 per cent.

This would be helped by Trump’s promise to cut the corporate tax rate from 35 per cent to 15 per cent. Even if this was reined to a slightly higher level, it would still give earnings a boost.

So, while much of the world was left dazed by the election result, the US equity market, which is in its eighth year of a bull market, roared its approval with the S&P 500 jumping to new highs.

Now, the S&P 500 is notoriously difficult to beat and, when it comes to investments, not my favourite part of the market. Recent research from Richard Foster, a Yale lecturer, has supported this. He found the average lifespan of an S&P company has fallen to 15 years, compared with 67 years in the 1920s. So, by 2027, 75 per cent of S&P 500 firms will be replaced.

I much prefer funds that invest further down the cap scale – the S&P 500 companies of the future. A fund I particularly like is the Schroder US Mid Cap. It is run from New York by Jenny Jones and her team, and has a small- and mid-cap focus, aiming to beat its index by 2-3 per cent per annum.

Ms Jones has run the fund since 2005, with the investment process underpinned by in-depth, stock-level analysis, which has led to superior stock selection, rather than sector allocation.

To help manage risk, stock ideas fall into three buckets: ‘steady eddies’, or less cyclically sensitive stocks, act as ballast in the portfolio; ‘mis-priced growth’ features stocks where Ms Jones feels the market has not fully understood the company’s earnings potential; and ‘recovery-type’ situations are the last and smallest bucket.