Still some wag left in the tail for US equity fund investors

WE ARE in the middle of US earnings season and to date first quarter results have been very strong, with positive outlooks for the rest of the year.

In its first quarter report, Marsh & McLennan announced yesterday that its net income had increased $77m to $325m. Earnings per share had increased 13 cents to 58 cents a share and revenues had risen 9 per cent, or $249m, to $2.9bn.

On Friday, Caterpillar outperformed all expectations. The earthmoving equipment manufacturer reported a revenue increase just shy of 60 per cent alongside a quintupling of profits, driving the share price up by 2.5 per cent to $115.41.

A recent survey by Ned Davis Research showed that CEO confidence is at a level not seen since the second quarter of 2004, and debt markets are reinforcing that confidence among investors with near-record low yields on junk bonds.

However, this news may not be all good for investors. With the Standard and Poor’s 500 doubling over the last two years, and yesterday’s disappointing ISM non-manufacturing figures, there are the inevitable worries that we are hitting the peak of the up-turn and that the index will soon take a turn southwards. However, James Abate, manager of the PSigma American Growth Fund, disagrees with this view: “We see further upside in the profit cycle which, in turn, will help continue the bullish trend in the US stock market. Bumps along the road, including Middle East flare ups and the recent Standard & Poor’s lowering of the US credit outlook to negative, have provided investor buying opportunities.”

Though the chance to profit from an equities upturn may not be over, the opportunity to just pick out a portfolio and ride the upward trajectory almost certainly is. According to Marc Shaw, client portfolio manager for JP Morgan Asset Management, careful stock selection is essential, “now that returns aren’t as easy to find, we are going to see real differentiation between the winners and the losers. Looking at large caps, mergers and acquisitions are picking up along with dividend payments. Technology firms are in an especially strong position, benefiting from investment made in the early 2000s, such as the laying of fibre-optic cables.” But he says that the small-caps shouldn’t be overlooked. Pointing to the likes of Google and Amazon, technology is an area where “you don’t have to be a mega-cap to be successful and have a dominant market position. Businesses started in a garage with a good idea can do very well.”

WHY US FUNDS?

But why should UK investors diversify their investments through US equity funds? With the focus on acronym funds, for example the rising number of Bric funds (Brazil, Russia, India and China) or the Mint grouping suggested by Fidelity Investments (Mexico, Indonesia, Nigeria and Turkey), why bother to look at the US rather than these countries that seemingly have the potential for greater growth?

According to Kully Samra, UK branch director for Charles Schwab, “the US is not suffering from the same structural problems as the Bric countries. India and China in particular are struggling with soaring inflation. Looking at the US we see fundamental growth, and feel that we are now out of recovery mode and into growth mode.”

So for those wishing to diversify their portfolio but who take the view that spiralling inflation could curb returns from the much hyped Bric funds, is seems there is still some significant US gains to be made, providing you pick your funds carefully.