By Pascal Dowling Fund managers in the North America sector are expecting the Federal Reserve to re...
By Pascal Dowling
Fund managers in the North America sector are expecting the Federal Reserve to relax its stance towards maintaining current levels of interest rates.
The Federal Reserve is meeting with chairman of the Reserve Board Alan Greenspan on 19 December, when fund managers expect a more neutral attitude to inflation control to develop.
Mick Brewis, head of the American desk at Baillie Gifford, said: "The Federal Reserve started raising interest rates last year, essentially because the economy was growing too fast at a rate of 6%.
"Inflation poses very little threat now and if the economy continues to slow at its present rate, we can expect interest rate cuts after the New Year."
Baillie Gifford's American fund, managed by Brewis, is ranked 43 out of 79 funds in the North America sector, with returns of 59.5% for the three years to 29 November 2000, below the sector offer to bid average of 67.5%. The fund also features below-average beta for the three years to 1 December 2000, standing at 0.83% against a sector average of 1.0%. However, the fund's shorter-term performance has seen improvement.
Returns for the year to 29 November stand at 16.3%, ranking the fund 12 out of 87 in the sector offer to bid. This improvement is continued in the three months to the same date, with returns of -4.4% that rank it 14 out of 87 bid to bid.
Brewis said: "We improved our sector coverage this year, allocating each member of our investment team for the first time with a specific sector at the start of January.
"This has given us a much greater depth and breadth of coverage across the sectors and had a noticeable effect on our performance." Brewis believes technology has suffered greatly as a result of the economic slowdown. He said: "While a cooling economy is good because interest rates will be cut, profits have suffered.
"Many technology companies were on such high price/earnings multiples that a slight slowdown in growth resulted quite drastic drops in their P/E ratios. Technology over the past three months has been an extremely difficult area."
According to Alex Ingham, American fund manager at Aberdeen, the unusually high price of oil is squeezing the costs of business and damaging profits, which are hit by this and by reduced consumer spending power from the same root.
Ingham believes the introduction in the US of new legislation designed to increase transparency in the market has added to already profound volatility in the US markets.
The new regulations on fair disclosure (regFD), prohibit the disclosure of non-public information to any individual or group unless the same information is made public at the same time, or promptly in the case of non-intentional disclosure.
As a result, according to Ingham, many US companies are now markedly reluctant to provide information on themselves.
He said: "Lots of companies are afraid of releasing any information at all for fear of breaching the new regulation. This silence on their part means rumour is the only source of information available to investors which can cause a great deal of problems."
Ingham also believes the depth of capital available in recent markets has added to volatility in the US.
He said: "It has been easy for new start-ups to get hold of a great deal of money recently. Uncontrolled inputs of large amounts of money into the sectors, most obviously into technology, that do not necessarily represent sound businesses have caused volatile conditions around them."
Ingham is involved in the management of Aberdeen's North America fund, ranked 77 out of 79 in the sector for the three-year period to 29 November, during which time it recorded offer-to-bid returns of 14% compared with the sector average of 67.5%.
Beta for the fund during the three years to 1 December was 0.93% against an average of 1%. Ingham said: "For the past three months we have been on a defensive footing, we are overweight in financials and healthcare, neutral in technology and energy and underweight in consumer cyclicals.
"We will see improvements in the performance of the market as a whole when the future of interest rates is clear and when we find out whether it will be a hard or soft landing."
Chris Galleymore, manager of Hendersons' North American fund, believes the chances of a hard landing are slim.
However, he believes an end to the seemingly endless US presidential squabble could turn out to be as important to US confidence as the results of the 19 December meeting at the Federal Reserve.
He said: "Next year, I believe we will still see profits falling. However, this will be offset by low inflation and interest rates, which we are sure will be cut.
"The 1990s saw some extraordinary returns which went on for a long time. I think we are seeing a return to more typical rates of return that we have grown unused to."
Galleymore's fund is ranked 34 out of 79 funds for the three years to 29 November, with returns of 64.8% against an average of 67.5%.
Beta for the fund is 1.02%, marginally above the sector average for the three years to 1 December.
Galleymore believes volatility in North America has come mainly from the technology sector which makes up 30% of the benchmark S&P500 Index.
However, he pointed out that the Henderson portfolio was not overexposed to technology and, as a result, volatility did not suffer excessively.
Galleymore said: "The portfolio is balanced to include a wide spread of sectors which means volatility is limited closely to the overall average for the North America sector.
"However, we do manage the portfolio actively, cutting stock when
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