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Fund Research & Insights

Whither North America?

The first part of our review of the IMA North America sector.

Christopher J. Traulsen, CFA 7 May, 2008 | 7:17AM
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The U.S. is the epicentre of the credit crisis roiling world markets, but markets there have actually held up reasonably well. In dollar terms, the S&P 500 rose 5.5 % in 2007, slightly better than the FTSE All Share ex IT performed in Sterling terms (with the dollar's depreciation factored in, the FTSE beat the S&P 500 by a wide margin). In other words, it's not as if the US has become screamingly cheap on a relative valuation basis. This is borne out by both forward and trailing P/E ratios, with the S&P trading at a premium to the All Share on both measures.

Funds in the IMA North America sector largely reflect these trends, but there are significant

differentiating factors. First, market leadership shifted dramatically from small and mid-caps to large-caps amid 2007's market turbulence. Even though the shift has reversed in 2008, the impact is still visible over the trailing 12 months: In that period, the top quartile of funds held an average of 78.7% in large caps and 21.3% in small- and mid-caps. Financials, of course have been among the worst performing issues for the obvious reason, and fund performance reflects this--the bottom quartile funds over the past year held 18.7% of equities in financials on average, compared to 14.5% for the top-quartile offerings.

We continue to think highly of several funds in this sector. Tom Walker's Martin Currie North American is near the top of our list. In Walker, it has an experienced manager, and one who's not afraid to focus the fund on his best ideas. The fund typically holds just 40 stocks, and frequently features sector weights that diverge from sector norms. As of 31 March, the fund featured a nearly 18% weight in technology hardware shares--nearly double the sector average of 10%--and just a 12% weight in financials, along with overweights in energy and resources (all as per cent of equities). However, it's well worth noting that Walker's style comes with an elevated degree of risk. Although the fund performed well in a turbulent 2007, it emphasises some pricier growth shares and cyclical areas. These happened to work well in the very specific conditions that resulted in 2007's turbulent market, but such won't always be the case. Still, we think Walker has shown the skill and ability to serve investors well over time.

We also think Smith & Williamson North American is well worth a look. Lady Tana Focke is one of the most experienced managers in the sector and has put together one of the better 10-year records in the group, delivering outperformance in up and own markets alike. Whilst she isn't afraid to shown higher risk shares--as demonstrated by purchases of technology stocks such as Apple Computer and graphics card maker Nvidia in late 2007--the portfolio is reasonably conservatively constructed to help control risk, and it's also fairly priced with a TER of 1.32% at last count.

For those of a more contrarian bent, we'll offer up several top-flight funds in our next column on the topic.

A version of this article previously appeared in Investment Adviser, Financial Times Ltd.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.

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