GIVEN all the bad news emanating from the American economy, suggesting now might be a good time to put money into US funds may seem like madness.
However, some brave professional investors are doing exactly that, especially with interest rates heading down and with presidential elections looming, both of which have traditionally boosted US equity markets.
Robert Burdett and Gary Potter, managers of the Thames River funds, recently increased their US holdings, largely because they think the dollar’s decline against sterling could come to an end, or even reverse.
British investors would see the value of their US investments rise if the dollar strengthens.
Burdett said: “We think exchange rates could turn in investors’ favour in the medium term. America is further along the economic cycle than Britain. We are only at the beginning of our rate-cutting cycle, and house prices have only just started to fall whereas they have been in a downward spiral for a while across the Atlantic.
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“As interest rates and house prices drop in the UK too, it should take pressure off the dollar relative to sterling.”
The Federal Reserve’s half a percentage point cut this week brought its main interest rate to just 3%, compared with 5.5% in Britain, and came eight days after its emergency 0.75 percentage point cut to try to avert recession. Equities rallied in response, and at one point on Wednesday the Dow Jones industrial average index was up by 201 points.
Indeed, research by Charles Reinhard at American investment firm Neuberger Berman (NB), found the US stock market has been up a year after the Federal Reserve started to cut rates in 10 out of the past 11 occasions on average by 16%.
The one exception was in 2001, but Reinhard claims that this was an aberration because it was when the technology bubble burst.
However, the market can be slow to respond to interest rates. According to NB, in four cases, stocks were still down five months after the rate cuts began.
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Liz Ann Sonders of Charles Schwab, the broker, said: “While we’re well into an interest-rate easing cycle in the US, the rest of the world is either still raising rates, as in China, or haltingly lowering them, as in the UK.
“After the recent outperform-ance of emerging markets, we may see money flowing back into the developed markets such as the US, as investors seek the safety of mature, transparent and liquid stocks.”
The US presidential elections could help to boost shares. Research from Capital Economics found that from 1897, the Dow Jones industrial average has grown by an average of 9% in election years, against an average rise of 7% in nonelection years.
The S&P 500 Index has increased by an average of 9.3% in election years, against 6.5% in nonelection years.
Martin Bamford at independent adviser Informed Choice, said that, despite all the talk of recession in the US, it is still a good time for the long-term investor to buy into North American company shares.
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“The combination of another Federal Reserve rate cut and the proposed stimulus package should ensure that the authorities avoid, or at least shorten, any impending recession,” he said.
However, Darius McDermott, managing director of discount brokers Chelsea Financial Services, issued a word of warning.
He said: “While the Federal Reserve’s rate cuts are certainly welcome news for equity markets and the US consumer, the desperate manner in which they have been executed is cause for concern. They are unlikely to restore consumer confidence and rebuild the devastated housing market overnight. It may be time for investors to consider how deep a hole the US is in, not how quickly it will dig itself out.”
If you are worried about the risk, Philip Pearson of Southamp-ton adviser P&P Invest said: “To overcome the risk of markets falling just after you invest, I advise the technique of drip-feeding your capital on a monthly basis into a collective fund. By doing so you will take advantage of any dips that may occur.”
Philippa Gee of adviser Tor-quil Clark likes Franklin Mutual Shares, M&G American and Threadneedle America Select, although she pointed out that investors can also get exposure to the US from a much more global fund, such as Artemis Global Growth, which currently holds 34.4% in North American shares, Jupiter Global Managed, which currently holds 11.4% in the US, and New Star Active Portfolio, a multi-manager fund, which holds 11.5% in the US.
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Advisers point out that active managers do not have a great track record when it comes to beating the US index. This is because American markets are highly “efficient” it is hard to unearth opportunities that have not been discovered.
However, some of the best funds can be found offshore. The Findlay Park US Smaller Companies fund, for example, has soared by 177% over five years, more than double its peers. It is available through Thames River’s Global Boutiques fund.
Alternatively, Bamford recommends trackers. He picks the Legal & General US index trust, which tracks the performance of the FTSE World USA index and has an annual management charge of just 0.75%. The HSBC American index fund, meanwhile, tracks the S&P 500 index and has an annual management charge of 1%.