British investors are steering clear of pure-play North America funds despite the market's many attractions, writes Paul Burgin.
The United States and Canada make up nearly 60% of the MSCI World index. Even though eight US companies take top ten slots in the global ranking, it appears British investors are not big fans of direct exposure to the market via North America funds.
The North America sector accounts for just 3.1% of all IMA sector assets – or just under 6% of all pure equity assets under management. The lack of enthusiasm among British investors for pure North American exposure may be down to consistency of returns.
The sector is beating UK All Companies, Global Emerging Markets and Global sector averages this year; however, since the financial crisis began, it has only beaten these key equity sectors in 2011 and 2008 (recording falls of 19% that year).
Have we fallen out of love with North America?
Consistency is a worry for active managers. The last year has been good for the Legg Mason Capital Management Opportunity fund, which ranked first in the sector during 2012 with gains of 38%, according to FE Analytics. However, the fund underperformed the previous year, ranking last out of 95 funds.
“We underestimated the severity of the crisis in 2008. In 2011, there was not much we got wrong but the market expected another 2008. That did not happen,” says Samantha McLemore, portfolio manager on the fund.
The team has reviewed the fund’s entire history, seeking out systematic errors. Risk measures have been improved too.
“In this market we sometimes wait for stabilisation. Now we are more active about hedging,” McLemore says.
The revised strategy appears to be paying off. The fund was positioned for domestic recovery late in 2011.
The big bets were house builders and mortgage finance. The fund held five of the S&P’s best performers last year, including Bank of America. Following significant rises, exposures have been paired back.
The fund is also counting on a turnaround in American aviation. McLemore admits the sector has not performed well historically. “It is a horrible business with high leverage, fuel costs and labour issues,” she says.
However, structural change and consolidation should change its outlook. Large airlines are cash positive, they have adopted rational pricing disciplines and some are paying down debt. United Continental, US Airways and Delta are all top ten positions.
US Airways rose 160% last year, notes McLemore. But while unloved sectors can return quickly to favour, the market’s favourite stocks can sour just as quick. Market expectations and reactions to news can be brutal.
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