High valuations, a concern over the stage of the economic cycle and the expected unwinding of ultra-loose monetary policy by the Federal Reserve are the main reasons IBOSS model portfolio manager Chris Metcalfe is avoiding US-focused funds.
The manager said that from “every aspect” the US market looks unappealing for investors, having been on an incredibly strong run for much of the past decade.
Indeed, over the last 10 years – a period which includes the sharp fall following the onset of the financial crisis – the S&P 500 has risen by 200.68 per cent, as the below chart shows.
Performance of index over 10yrs
Source: FE Analytics
“America is much further through the economic cycle and has lots of quarters of growth now,” Metcalfe said, noting that the market is nearer the end of the cycle than the beginning.
However, the main issue he has with investing in the US is new president Donald Trump and his inability to push through much-needed reforms.
“The problem is with Trump who is turning out to be surely the least effective president in the history of America,” the model portfolio manager said.
“He has got nothing through in regards to tax or infrastructure or anything else really. He might get bits and pieces through but it is not going to be enough and there is no guarantee that he can get anything done.
“America does need tax reform, it does need infrastructure spending but he [Trump] doesn’t look like the guy that is going to get it done. That is a downside for the US economy going out from here.”
“These are the sorts of things that should play out in the real economy and the stock market should ultimately reflect the real economy,” he added.
At the same time, valuations are “sky-high” when compared to almost anywhere else in the world with just the Irish and Danish markets exhibiting higher CAPEs (cyclically-adjusted price to earnings ratios), the manager noted.
“From an investable universe point of view it is basically the most expensive. So, they have got a very poor [presidential] administration in our opinion and sky-high markets,” Metcalfe said.
Additionally, the Federal Reserve has signalled to markets that it is just to start either running down the balance sheet, raise interest rates, or both.
This shift would also likely have a detrimental impact on companies as interest rates rise, squeezing consumption and encouraging savers as well as increasing the rates on debt, with Metcalfe noting: “That is a pretty poor backdrop”.
As well as being bearish on the US, he is also backing Alastair Mundy’s Investec Cautious Managed fund across all of its models, which has an actively short position on the S&P 500.
“We really do have a structural underweight in the US,” the manager added.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund has been a top quartile performer over the long term, returning 75.33 per cent over the last decade but has struggled more recently, sitting in the bottom quartile of the IA Mixed Investment 20-60% Shares sector over the last year.
However, Metcalfe is not completely pessimistic about the market, highlighting that the US banking sector was among the first globally to reform following the financial crisis of 2008.
“The thing that America has going for it, is it handled the end of the financial crisis better: it got its banking situation sorted out relatively quickly while Europe was miles behind,” Metcalfe said.
Performance of indices over 10yrs
Source: FE Analytics
This is particularly apparent when compared to the UK banking sector, which took longer to reform and has therefore made a lower return.
As the above chart shows, over the last decade the S&P 500 Banks index has returned 197.37 per cent – just behind the wider US market – while the FTSE All Share Banks index has returned just 70.97 per cent.
While Metcalfe does not hold any US specific funds, the manager said he is aware that he has some exposure through his global fund segment – a position he is comfortable with.
“There are certain times when we have funds that don’t support our central case but then again we might be wrong,” he said.
“Via the global funds we have exposure to the US and we have used the Henderson Global Growth fund for quite a while.”
The five FE Crown-rated fund has been a top quartile performer in the IA Global sector over one, three, five and 10-year periods, returning 232.91 per cent over the last decade.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The £505m fund has been run by Ian Warmerdam since 2009 with Ronan Kelleher joining as co-manager last year.
Currently the fund has a 59.1 per cent weighting to the US with a 30.8 per cent weighting to the information technology sector and the likes of Apple, Facebook and Amazon.com among its top 190 holdings.
“They are overweight technology so this is really a long way from where we are: overweight the US and overweight technology within that,” Metcalfe said.
“But the team have done very well. The fund has performed very well and it is in there even though it is not your central case because you can be wrong and wrong for a long time.”
Previously, FE Trustnet looked under the bonnet of the IBOSS model portfolios and at the three funds the team are backing in one of their favoured equity regions – Asia.