US growth at state level is diverse and well-situated small-caps benefit far more than their larger peers. Robert Anstey, lead manager of Hermes' US SMID Equity fund, explains.
One of the joys of small- and mid-cap investing is that one can take advantage of a level of granularity denied to our large-cap peers. For instance, if you buy a large-cap US stock whose main market is the US, you are pretty much buying US Inc. Your US-wide stock gives you US-wide growth – the national average, in broad terms.
By contrast, small- and mid-caps are often much more representative of – and conditioned by – the individual states within which they do business. It is as if you were offered the choice between a broad European index and the opportunity to move between, say, Germany and Spain, as the opportunities present themselves.
Similarly, some US states are strong and resilient, while others are only just beginning to emerge from a long period of weakness. North Dakota is a good example of the former; Florida the latter.
Small and mid-cap investing in the US
While the US is widely regarded as responsible for leading the world out of recession, national unemployment is still 7.6%, the Federal budget for the 2013 fiscal year is predicted to be in deficit to the tune of $973bn and, after the brinkmanship of the fiscal cliff, taxes are rising.
In North Dakota, however, unemployment is a mere 3.2% (the lowest in the country), the state budget is at a record $1.5bn surplus and taxes are falling. The state is a beneficiary of the advent of fracking and is constructing its first new refinery since 1976. Oil is being transported by rail, driving strong performance in this area. But the effects are much wider, with areas from housing to medical benefiting.
MDU Resources is a good example of how an investor may access this growing prosperity. It is a diversified natural resources company, where the ‘D’ originally stood for Dakota (the ‘M’ being Montana), drawing much of its revenue from North Dakota.
The business has strong cashflow, generated from each of its divisions: utility and pipelines, energy exploration and production, and construction. Its utility business is the main provider of electricity and natural gas in North Dakota.
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