Look beyond the US election for long-term growth

Given this divergence, it might be time to consider whether you still have an appropriate amount of US exposure. If you have been investing for a long time, the proportion of your portfolio that you originally invested in the US may now be significantly larger. So check this, and consider whether you are still happy with the proportion of your investments it accounts for and what US investments you hold. 

The US equity rally since March has been largely concentrated in a handful of mega-cap technology stocks. A number of wealth managers have been reducing their overall exposure to the US in recent weeks because they think that valuations look stretched and the scope for these companies to continue to grow at such a rapid speed may be curbed by antitrust proceedings.

“We are positive on the US, but have recently reduced our exposure,” says Roger Alster, chief investment officer at Close Brothers Asset Management. “The US market has had a tremendous run, but the risks are increasing”. 

Possible election impact

If you invest in assets such as equities you should take a long-term view, and many managers of US equity funds look for companies with good long-term growth prospects that should do well over such a time period – regardless of short-term events. However, it is still important to understand what impact the outcome of the election on 3 November might have. 

Although Democrat candidate Joe Biden is currently ahead in the polls, there is no certainty that he will win. From an investor's point of view, what is important is how much support the winner has in Congress. If the Democrats win a clean sweep in both US parliament chambers – the House of Representatives and the Senate – they will have more power to push through policies such as tax increases, an increased minimum wage, healthcare reform and tighter regulations – in particular on technology companies.   

If Mr Biden wins the presidency but the Republicans maintain control of the Senate, Mr Alster says that “not much will change”. Under either party, investors can expect that a large stimulus package will be passed and large tech stocks will gradually be subjected to tougher regulation, which is likely to be stricter if Mr Biden wins and the Democrats control Congress.

Fran Radano, manager of North American Income Trust (NAIT), says that another term under Mr Trump is likely to lead to less global trade. This would be beneficial to domestic-orientated businesses, but not to exporters.

“A President Biden will be more globally open and focused, but this may be at the expense of some domestic US businesses that face competition from overseas,” explains Mr Radano.

Key risks

If the Covid-19 pandemic gets worse it is likely to have a negative effect on equities markets. Conversely, a pick-up in the US economy and better than expected economic data could also pose a risk to US equities, according to Mr Alster. This is because it would result in an increase in US interest rates, which would be likely to have a negative effect on the US equity market, and might also lead to a reduction in demand for big tech products. 

Jason Hollands, managing director at wealth manager Tilney, says that we are “possibly at a tipping point” for big tech companies because of the rise in real interest rates, and it is possible big investors will rotate into more cyclical companies. “And don’t underestimate the potential risk of changes to the antitrust law to clip the wings of big tech,” he adds. 

A continued depreciation of the dollar is a risk for UK-based investors.The US budget deficit has grown rapidly under stimulus measures to support the economy this year. Since the US Federal Reserve committed to make unlimited bond purchases in late March, the value of the US dollar declined from 87p to 77p to the pound, as of 7 October. 

Mr Hollands says a reasonable assumption is that the US dollar will continue to weaken whoever wins, but especially if spending increases under a new administration.

“The chorus of voices warning of dollar weakening has been growing, with prominent University of Yale economist Stephen Roach last week predicting a tanking of the greenback by the end of 2021,” he says.  

How to get US exposure

Regardless of the risks, the US is a big market with many investment opportunities for long-term investors. Justin Modray, founder and director of Candid Financial Advice, suggests that many UK investors could consider having between 25 and 35 per cent of their stock market holdings exposed to the US. This exposure could be spread across thematic, global and US-specific funds.  

For investors with a high risk tolerance, Baillie Gifford US Growth Trust (USA) has performed exceptionally well since it launched in 2018. The trust invests in listed and unlisted US companies that its managers believe have the potential to grow substantially faster than the average company. The trust had 39 holdings at the end of August, the three largest being Tesla (US:TSLA), Amazon (US:AMZN) and Shopify (US:SHOP).

This trust holds some companies on very high valuations – certainly according to traditional metrics – so is likely to prove more volatile than other US funds, although Baillie Gifford has a good track record of long-term wealth creation. The trust was also trading at a premium to net asset value (NAV) of over 6 per cent as of 12 October, so it could be worth waiting for a more attractive entry point.    

JP Morgan American Investment Trust (JAM) may provide a more cautious option. Timothy Parton, co-manager of the trust, says he is currently focused on investing in companies that “are committed to strengthening their balance sheets while also finding opportunities that are out of favour”. Jonathan Simon and Mr Parton took over management of the trust in June last year, and changed the strategy to a higher conviction and more concentrated portfolio. The strategy looks successful so far, with the fund’s NAV up 17 per cent over one year to 9 October, ahead of the S&P 500 index's return of 14 per cent. The trust was trading at a wider than average discount of 5.8 per cent as of 12 October.

For investors looking to play the sustainability theme, Rob Morgan, pensions and investments analyst at Charles Stanley, highlights Brown Advisory US Sustainable Growth (IE00BF1T6X55). This fund looks to invest in companies with sustainable business advantages, such as increasing customer loyalty or high employee engagement and retainment. Mr Morgan says that its managers’ stock selection has added “significant value” since inception in April 2017, and it has a reasonable ongoing charge of 0.87 per cent. 

Although passive US funds have done very well in recent years because of the prominence of very large high-growth stocks in indices, it might be worth diversifying exposure if your holdings are highly concentrated in the tech mega-cap stocks. The S&P 500 index, for example, is market capitalisation weighted and has heavy exposure to big technology companies. Apple (US:AAPL), Microsoft (US:MSFT) and Amazon made up over 18 per cent of the index at the end of August.

“Passives have become the default option for many investors’ US exposure, an approach that has worked well, but it leaves you fully exposed to being sucked into the ever more concentrated vortex of the big tech stocks,” says Mr Hollands. “It might therefore be time to reappraise this approach by either partially allocating into active funds with a more value aware style bias or factor funds that rank stocks on more than market-cap alone.”

Options include Invesco FTSE RAFI US 1000 UCITS ETF (PSRF), which tracks the 1,000 largest US companies, but weights exposure based on four factors: revenues, dividends, net assets and cash flow. This gives broad exposure to the US market, but is more skewed in favour of businesses with reasonable valuations. Its ongoing charge of 0.39 per cent is significantly lower than those of most active funds.

You can also get US exposure through thematic or global funds, some of which have the majority of their assets in the US. LF Blue Whale Growth (GB00BD6PG563), for example, had 70 per cent of its assets in the US at the end of September. Its three largest holdings were digital content provider Adobe (US:ADBE), construction software maker Autodesk (US:ADSK) and medical device manufacturer Boston Scientific (US:BSX). The fund's manager, Stephen Yiu, has a sharp focus on valuation, which might make the fund more resilient than peers if markets turn.   

Read our tip on LF Blue Whale Growth in the issue of 18 September and our interview with Stephen Yiu in the issue of 15 May.

Funds focused on technology or healthcare stocks are likely to have a majority of their assets in the US. Allianz Technology Trust (ATT) and Worldwide Healthcare Trust (WWH) had 89 per cent and 64 per cent of their assets in North America at the end of August. These investment trusts are also a good way to get exposure to dominant investment themes.