The Neptune US Income fund, manager Rebecca Young's first sole mandate, has got off to a good start. In 2011 it delivered the third best total return out of more than 70 growth and income funds in the IMA North America sector. The fund also boasts the highest yield of any fund in the sector offering 3.5 per cent.
While analysts increasingly advocate the attractions of a broader based global income fund, especially as historically the US market has had a relatively low yield - currently around 2 per cent, Ms Young is adamant that there is room for both a US and global income fund in your portfolio.
"You don't need to buy either or," she says. "The US is largely undiscovered for income and so creates opportunities. Investors see the average dividend yield on the S&P 500 which is not attractive. But this is hiding the yields available. The US is such a large and diverse equity market it creates incredible opportunities to go down the capitalisation scale and deeper into sectors."
She points to the energy sector where there is a huge selection of pipeline companies which pay attractive yields of around 4 per cent. "Among financials you get real estate investment trusts (Reits) which cover sub sectors such as offices and storage facilities. You really have a lot of flexibility to go into areas that a global income fund can't always access," Ms Young adds.
US yields are also fast catching up. "In many sectors there are already yields comparable to the UK and Europe, while the prospects for dividend growth are much better than elsewhere because corporates are in such good shape," she explains. "US dividend payments have been historically low but companies now have cash on their balance sheets to raise dividends."
Some companies are initiating dividends for the first time, a recent example being Cisco, while Microsoft raised its dividend by 25 per cent last year.
"US companies are beginning to understand the importance of paying dividends," she adds. "This is in part because of the baby boom generation retiring placing pressure on listed companies, especially as you can't get a decent yield on other assets such as US Treasuries. We think dividend growth in the US has got good potential and should rival global peers."
When looking for companies, Ms Young tries not to distinguish between income and growth stocks. "We like companies which can deliver both," she says. "Limited Brands, for example, has double-digit earnings and dividend growth. It yields around 3 per cent and is growing its dividend. I think these types of stocks work well. Some of them trade at a premium but this is usually the case because they can grow in challenging macro economic conditions."
Other examples include fast food restaurant McDonalds and Coca-Cola.
"Every company I look at pays a dividend and is likely to yield 2 per cent plus," she continues. "There are one or two with lower yields but I expect significant dividend growth from these - 2 per cent plus going forward. Capital appreciation is important but we try to play this through high-yielding companies."
In keeping with Neptune's investment process, stock selection starts with analysis of sectors. "We think it is much better to look at the world on a sector basis," she says. "From that we work out the sectors which offer the best opportunities and find companies which express that theme best."
On valuations
An investor criticism of US stocks has been the fact that they have been more highly valued than UK or European ones. "US valuations are still attractive," counters Ms Young. "The US has been a relative outperformer for a while and its economic data has meaningfully improved over the last few months, which suggests a recovery here is increasingly sustainable."
She argues that you can still find value in the US market especially in cyclical sectors to which she has tilted the fund in recent months, in contrast to the more defensive stance adopted during the third quarter of 2011.
Examples of cyclical holdings include industrials, with recent acquisitions including aerospace stock Boeing and railway operator Union Pacific. She also likes parts of the energy sector and financials - an area many have shied away from following the financial crisis.
"We had been underweight banks for quite a while but now hold PNC and Fifth Third Bancorp which are a play on the US domestic economy," she says. "They have no eurozone exposure and are not involved in investment banking. These should increase their dividends or do share buybacks."
The manager's main concerns are how the problems within the eurozone will play out, as this could have a detrimental effect on equities globally, as well as Chinese economic policy and growth, and the US presidential race later this year.
"But there is potential for positive policy from the Federal Reserve because Obama wants to be re-elected," she adds. "But are very much aware of what is going on in Europe and emerging markets concerns, so when stock picking we make sure we go for the right sub industries."
Can she keep up the good work? "Part of the out performance last year is because income stocks did well, she admits. "If markets rally we would not expect to keep up with the benchmark because that is not what this fund does: its aim is to deliver income - and some capital appreciation. Although we hold some cyclicals it may underperform growth funds."
But Ms Young is confident that the fund will meet the yield achieved in 2011 again and expects to grow this figure going forward. "There is real potential for dividend growth among high yielding stocks and we expect that to continue both this year and in the long-term. It's an attractive way to access US markets."
