in the us, the value players are those currently dominating the performance charts with growth funds still suffering
Performance for offshore US equity funds over a five-year period has been fairly positive, with the top performing Nordea 1 North America Value achieving a five-year performance figure of 209.3%. Portfolios that performed well invested in value stocks and stayed clear of positions that were heavily weighted towards large cap stocks.
The Nordea 1 North America Value fund has gone through periods of volatility over the past five years but has been the top-performing product. Out of the five years the main good performance can only be attributed to the years 1998 and 2003. Companies which portfolio was invested in during 2003 included International Game Technology, Countrywide Financial, Gannett, Knight Rider, Microsoft and the New York Times.
Its investment philosophy focuses on a value-orientated approach, which is based on the earnings power and the financial strength of the companies. Earnings power is defined as the ability of a company to generate a substantial discretionary cash flow to its owners.
Stocks are chosen through analysing management, financial statements, industry structure, product lifecycles, the operating environment and the company's place in the value chain. Companies must also require a discount of about 50% to the fair value of the cash flows to be considered an interesting investment opportunity.
Nordea's belief is in buying a growing business at around 50% of what Nordea thinks it to be worth, makes it realistic to expect a doubling of the investment over five-years, translating into an annual average of 15%.
It also invests a minimum of two-thirds of net assets in equities, other equity shares such as co-operative shares and participation certificates, dividend-right certificates and warrants on transferable securities issued by companies that are domiciled in North America. The portfolio consists of about 50 stocks.
The Merrill Lynch US Focused Value Fund achieved a performance figure of 179.4% over a five-year period and was ranked second. Bob Martorelli manages the portfolio.
Martorelli says: "The fund's success is attributed to its bottom up stock picking approach. We look for stocks that are trading near their lows, and buy the ones that we thinks will eventually ride through the rough times and improve their operations. Which will hopefully lead to a significantly higher stock price at some point."
The main positive performance of this product can be found in the year 1998 as well as 2003. Another factor that has contributed to the good performance has been the ability to invest across market capitalisations as well as the plays in stock selection. The portfolio invests in small and mid-cap stocks as well as large caps. Recently this asset class has done reasonably well over the course of the year.
For example, stocks such as 3Com and LSI Logic, which are technology-orientated stocks, were bought close to their lows around a year ago. These companies were trading at valuations equal to the cash on their balance sheets a year or so ago. According to Martorelli invest- ors rarely have the opportunity to buy large-capitalisation companies at those types of valuations.
He believes as investors have become more comfortable with the fact that these companies are not going out of business and that there is some light at the end of the tunnel economically and in their businesses, they have driven these smaller-capitalisation stocks up significantly.
Martorelli also uses a value type approach and this is the single most important variable on how he looks at a security and tries to decide whether or not it belongs in the fund.
He says: "Value has done extraordinarily well in this recovery. Historically, coming out of economic downturns, which is what we had in the US a year or so ago, value stocks outperform growth stocks coming off of the bottom because this is where the earnings is leverage is. For example, a value stock will go from earning $5 a share at the peak to losing $2 a share in a tough economic environment. Then, all of a sudden estimates will start moving up again - going from losing $2 a share to making $3 a share. This kind of volatility in the earnings number, causes large swings in the stock prices of these companies as soon as people start feeling better about the direction of the economy."
The portfolio has changed tremendously in asset allocation throughout the past five years. A year ago, Martorelli says the only thing people wanted was the safety of healthcare and consumer staples stocks, because they were unsure of the economic direction and desired much lower risk profiles. Investors just wanted to be more defensive and safe. As a result of this psychology, defensive stocks got driven up to much higher valuations while turnaround, troubled, contrarian companies fell to very low valuation levels.
Today Martorelli says the psychology has totally reversed. The portfolio has taken on a different asset allocation.
"People's risk profiles are rising. Investors are willing to take on incremental amounts of risk in their investment portfolios and have moved in the other direction by taking on a significant amount of riskier stocks and totally neglecting the other side of the equation.
"It is the defensive stocks, the consumer staple, the pharmaceutical, and the healthcare stocks that are starting to appear as the most attractive investment to us. That's why we have been moving into those situations. These companies have very strong cash flows, very stable earnings, and are raising their dividends and buying back stock, four very attractive investment characteristics that we like," he says.
Both the Fidelity AW American Growth and the Fidelity Funds American Growth performed well over a five-year period. Each achieved a performance figure of around 98% over the time scale. Neal Miller manages both portfolios and investment strategy and is biased towards small and medium sized companies.
Frederic de Merode, portfolio strategist at Fidelity, attributes the funds' success to its overweight positions in technology and consumer discretionary. Although the fund suffered when the technology bubble burst, overall these themes have led to out performance of the portfolios. Miller's main philosophy is to invest in themes linked to the concept of change.
The bottom-performing fund, the Fructilux Actions USA, achieved a return of -24.5%. The portfolio run by Jacques-Laurent Josse focuses on large caps.
According to Josse the weighting of the portfolio in large caps in the technology, communications, media, financial, and consumer discretion area led to the over-performance of the product in 1999. However, in the following years the portfolio under performed because of over exposure in the TMT area when the bubble burst. In 2003, Josse started investing in small caps that has led to some out-performance.
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