There will be a huge focus on the world’s largest economy next month, as America decides whether Donald Trump remains in the White House or not.
Trump’s tenure has been eventful to say the least. The incumbent has made many claims in his time, not least about the US economy where he feels he created historic growth and record low unemployment – at least he thought he had until 2020 ‘happened’.
Following the onset of the global pandemic, the US economy entered recession earlier this year, ending the longest economic expansion in its history. The worry for Trump is that since 1900, only one president has won re-election with a recession occurring sometime in the last two years of their first term.
But while the economy has contracted, the stock market has recovered well since the sell-off in February -March, with the S&P 500 closing at a record high in August 2020.
The much-publicised FAANG stocks – Facebook, Amazon, Apple, Netflix and Google/Alphabet – have been the driving force behind the recovery, but there is so much more to the economy than these tech behemoths.
According to LF Miton US Opportunities managers Nick Ford and Hugh Grieves: “The backdrop of a strong recovery in business activity is likely to drive sector rotation, as investors bank gains in popular growth stocks and reinvest in less glamourous, but far more attractively valued companies, in the lower echelons of the S&P 500 Index and smaller-cap indices.”
These managers believe their fund is very well positioned to capitalise on such an outcome given the fund’s weighting to smaller-cap domestic companies.
Launched in March 2013, this fund is bottom-up, but does have a macro awareness which is built in at the end of the process. As a result, it focuses on a small number of higher-quality 'sustainable franchises'.
The managers begin with a screen to reduce the investable universe.
Stocks below $1bn are removed first. They also screen out some capital-intensive industries such as airlines, biotech and miners. Finally, they screen for positive revenue growth. This reduces the investable universe from 3,000 to around 1,100 stocks.
The team makes regular trips to the US and meet around 200 companies a year.
There are three key characteristics they look for in any potential investment: consistent and sustainable cash flow, capital light (generating a high proportion of cash relative to the tangible assets in the business) and the ability to reinvest cash profitability, so returns compound over time.
The managers then screen for greater than 20 per cent cash return on invested cash and low debt - this is then combined with a qualitative overlay. Every idea is subject to a Porter's Five Forces analysis: these are the threat of new entrants, power of suppliers, power of customers, risk of substitutes and intensity of competition.
Around 400 stocks make it through to this stage and the managers maintain valuation models on these companies. They then combine their quant models with qualitative factors; macro awareness, investor expectations, relative strength, directors' dealings and earnings revisions to generate a buy, wait or sell decision.
They like to invest in companies with a margin of safety. If a stock's reward is outweighed by the risk, it will be sold.
Those stocks with buy signals and the highest conviction will make it into the final portfolio, which typically consists of 35-45 holdings. The fund has an ongoing charges figure of 0.9 per cent.
Generally benchmark agnostic, this fund has consistently outperformed the IA North American sector, returning 119.6 per cent vs. 104 per cent in the past five years; what makes this even more impressive is that it has garnered this performance despite being consistently underweight to the FAANGs. This makes the fund a really compelling offering, giving investors true diversification in the world’s largest economy.
Darius Mc Dermott is managing director of FundCalibre
