fund manager believes US market is overvalued and is taking a defensive position with his portfolio
Neil Smeaton, the manager of the Dublin-based Collins Stewart US Equity Focus Fund, has positioned his portfolio defensively in anticipation of a correction in the US market.
While most managers are confident the recovery in the US stock market will continue, Smeaton and co-manager Piers Watson believe the US market is overvalued and artificially buoyed by the bullish extreme of sentiment.
"The big US deficit and weak dollar continue to create problems. The Fed has little fire power left to produce economic stimulus," Smeaton said.
The Collins Stewart US Equity Focus Fund, now £7m, was launched in June 2003 and has an aggressive portfolio of 30-40 stocks. Smeaton was head of US equities at Aegon Asset Management from 1997 to 2000, where he ran the frAAA-rated Aegon American Fund. Prior to joining Aegon, he held the same position at Edinburgh Fund Managers.
Over the past year, the manager has held 30%-50% in cash, and is now at the lower end of that spectrum. Smeaton said although the US market has risen over the past six months, in sterling terms it peaked five months ago. The higher cash strategy has therefore been beneficial, he said, adding that once the portfolio is fully invested, the maximum exposure to cash will be 20%.
Similar to the process he used at Aegon, Smeaton starts constructing the portfolio using a quantitative screen as his first steps. The starting point for portfolio construction is the research universe of 120 stocks. Inputs of the quant screen include value, momentum, use of capital and profitability.
The quant screen will produce a short list of 50 stocks and Smeaton and Watson will then research the fundamental and technical aspects of companies to derive the best 20 companies. This forms the core of the portfolio.
Between 60% and 80% of the portfolio is held in core stocks, and 20%-40% in tactical plays. Smeaton described the tactical plays as short-term holdings that present trading opportunities. A good example is Smithfields Foods, which he bought when the share price fell sharply on the back of the recent mad cow disease scare. "However, 80% of Smithfields Food"s business relates to pork so the company"s profits are unlikely to be significantly affected," Smeaton said.
Examples of core holdings include insurance company AllState and Exxon Mobil.
Smeaton said he operates with clear buy and sell disciplines to maximise returns in rising markets and minimise falls when the market is in decline. This bottom-up stockpicking is combined with a top-down view on sectors and the market as a whole.
A prevalent theme in the fund is the overweight stance on the energy sector. The fund is 12% invested in this sector - double the S&P 500 exposure of 6%. Smeaton expects the energy sector will continue to perform well and is benefiting from having recently passed through a consolidation phase.
"Companies tend to care about shareholders and are paying decent dividends. I expect the oil price will average $30 over the next 10 years, which is higher than the average over the last 10 years," he said.
Meanwhile, Smeaton is underweight consumer discretionary stocks. Despite the fact these companies represent 11% of the S&P 500, the Collins Stewart US Equity Focus fund holds just 5%. "Consumer discretionary stocks are overvalued, having performed well in the past year," he said.
The annual management fee on the fund is 1.25%, however there is an incentive fee of 20% outperformance of the S&P 500 index.
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