By Leo Bland Some of the better performing US funds have made use of cash holdings during times of m...
By Leo Bland
Some of the better performing US funds have made use of cash holdings during times of market volatility in a bid to lock in gains.
Both Scottish Equitable American and Britannic American Growth have used cash positions of more than 10% to combat drops in the market in 1998 and 1999 to hold on to fund performance. Terry Ewing, head of US equities at Britannic Asset Management and lead manager of Britannic American Growth, said this strategy helped reduce volatility in the fund, particularly during the US market downturn of summer 1998 and also last year. Britannic American Growth has a beta of 0.92, below the average for the sector of 1.0.
Ewing said: "We are trying to post consistent outperformance and try to be in the top quartile over the calendar year. The fund has core and non-core positions and most of our core holdings are focused on the best quality companies in the S&P 500.
"The core makes up about two-thirds of the fund with one third in non-core holdings. These may be high quality companies outside the S&P 500 or may be stocks where we have a short-term focus.
"In particular, we look for improving stocks in terms of factors such as earnings or competitive position."
Neil Smeaton, lead fund manager of Scottish Equitable American and head of US equities at Scottish Equitable Asset Management, said one of the main reasons for the fund's performance over the last three years has been its holdings of cash during the market downturns of October 1999 and October 1998.
Scottish Equitable American has a beta of 1.02, higher than the sector average of 1.0. Smeaton said it has also been helped by the decision to move to an underweight technology position before the fallback in these stocks during the spring. Scottish Equitable American has an frAAA rating and is 20 out of 89 funds in the North America sector over one year to 23 August on growth of 35.4%.
Smeaton said: "We run a specialist technology fund, Scottish Equitable Technology, which gave some added value to the group when making technology decisions on the US fund."
Smeaton added that the impending US presidential election is having a limited impact on stocks. "I still do not see it as a major factor for financial markets although it does create uncertainty. However, there is talk that Al Gore may have a clampdown on the pharmaceuticals companies because of their drug pricing. But we believe that Washington is extremely business friendly right now as most Senators and Congressmen are known to be heavy investors in the stock market. I would think that the political environment will be favourable over the longer term."
Scottish Equitable American is running comparatively neutral sector positions on the back of market uncertainty caused by the impending elections.
The fund is slightly underweight technology and Smeaton said most of the money that has been reinvested has gone into the healthcare sector, while he also favours capital goods firms. Smeaton holds General Electric, as he said that the solid earnings growth delivered by this type of company is attractive in the current uncertain environment.
The fund is running with a portfolio of 97 holdings and typically has a range of 90 to 110 stocks. Smeaton initially looks at factors such as P/E ratios, price to sales, price to book as well as earnings revisions and price momentum when screening stocks.
Analytical coverage of the US market is split between the seven investment staff on Scottish Equitable Asset Management's US desk. Smeaton said: "The type of companies we have been looking for are ones that rank well in our statistical screen-ing and where there is a high quality management team. We are keen that companies we hold operate in an attractive industry with good growth prospects or where we see that the market is not fully factoring in the earnings growth that is likely to be delivered."
Smeaton is not keen on consumer staples stocks such as Coca-Cola and Gillette, as he said these firms are facing intense competition and pricing pressure. Although Smeaton is underweight technology, he is favouring Nortel and Oracle, which are both set to benefit from internet infrastructure spending.
Britannic American Growth has a more concentrated portfolio of between 50 and 60 stocks and Ewing added the fund manager and analyst role is combined so coverage of the market is split between the four strong US team by sub-sectors, to give staff a mix. For example, the broad financials sector is split across the equity team with members covering banks, insurance companies and credit card firms.
Ewing said this helps the investment process as it facilitates better discussions on sectors as fund managers covering different sub-sectors can debate stock and sector merits more knowledgably than if there was a dedicated financials analyst. He added: "The US equity story is based on the productivity revolution, with the amount of capital expenditure going on boosting productivity across the US economy.
"The whole of corporate America is using new business processes, taking out costs and becoming more efficient. We are looking for companies where managements are prepared to review their business processes on a constant basis."
Britannic American Growth is ranked eight out of the top 10 in the North America sector in the period between May 1997 and June 2000 on growth of 151.53% and much of the fund's performance over the past year has been down to holdings such as Sun Microsystems, JDS Uniphase and Nortel.
The fund is overweight in the internet software infrastructure area of the market but is underweight computer services where Ewing said margins are coming down. Britannic American Gro-wth has an overweighting limit of 2% on individual stocks against an index weighting in a bid to reduce stock specific risk.
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