Ian Cowie explains why North America makes sense.
Since inflation and interest rates began to rise, many ‘jam tomorrow’ shares that pay no dividends today but promise growth in the future have fallen from favour. Nowhere is that more obvious than in New York’s Nasdaq index of technology shares which is now in ‘bear market’ territory after falling by 24% since the start of this year.
However, even after such a brutal rebooting, the Nasdaq continues to trade 95% higher than its level five years ago. The latter figure should be more important for long-term investors than short-term stock market shocks.
For comparison, the Standard & Poor’s 500 index, a broader measure of the American market, is 14% down since January 2022, and 69% up over five years. Meanwhile the FTSE 100, Britain’s blue chip benchmark, has proven resilient since the start of the year, rising 1%. But it is virtually flat over five years with a return of 0.3%.
All those numbers illustrate why it is important for investors to consider some overseas asset allocation alongside UK exposure. This can diminish risk by diversification and enhance our exposure to rewards including growth and income, wherever they may arise.
Even before Brexit divided opinion within our sceptred isle, and caused some foreign investors to shun Britain, it made sense for UK shareholders to consider some exposure to America. Bear in mind that businesses listed in the United States account for nearly 61% of the value of the MSCI All Countries World Index (ACWI), a widely-followed global benchmark.
By contrast, British companies comprise less than 4% of the MSCI ACWI. Without wishing to labour the point, it is noteworthy that all the top ten shares by value in this global index are American.
Closer to home, investment companies listed in London and governed by British laws and regulations intended to protect investors, make it convenient and cost-effective to invest in America. Better still, contrarians who like to buy when others are selling shares that have outperformed over the long term but underperformed in the short run may find bargain opportunities on the other side of the Atlantic.
"Closer to home, investment companies listed in London and governed by British laws and regulations intended to protect investors, make it convenient and cost-effective to invest in America."
For example, shares in the AIC North America sector are trading at an average discount of 21% below their net asset value (NAV) after suffering negative total returns – or shrinkage – of 8% over the last year but altogether more satisfactory positive total returns of 108% and 305% over the last five and ten years, respectively.
By contrast, the average investment company is trading at an average discount of 8% after delivering total returns over the same three periods of minus 6%, plus a positive 41% and 214% respectively. For AIC UK All Companies, the average discount is 12% with returns of minus 21% and a positive 21% and 182% respectively.
As you might expect, investment companies within the North America sector offer a wide variety of characteristics, strategies and returns. Pershing Square Holdings (stock market ticker: PSH) has total assets of more than $9.3 billion and is the sector leader over five years with total returns of 112% from underlying assets including Chipotle Mexican Grill and Starbucks. But PSH has shrunk by 11% over the last year and trades at a whopping 33% discount to NAV as Bill Ackman, its fund manager and activist investor, continues to divide opinion.
JPMorgan American (JAM), which has total assets of more than £1.5 billion, stands second over the last five years, with total returns of 105%. JAM’s more conservative approach has enabled it to retain positive returns of 16% over the last difficult year. Underlying blue chip assets include the digital technology giants Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL).
To complete a triumvirate of top performers in the North America sector over the medium term, we must cross the border to Canadian General Investments (CGI), which is also big with total assets of C$1.2 billion, which delivered total returns of 91% over five years and 1% over the last year. CGI, in which I am a shareholder, has a diversified portfolio that includes the self-descriptive West Fraser Timber; a gold royalties streaming company, Franco-Nevada; and the spectacular Canadian Pacific Railway.
While PSH pays dividend income of 1.5% and JAM yields less than 1%, CGI delivers just over 2.5%. Interestingly for income-seekers, JAM has raised its dividends by an annual average of nearly 7% over the last five years, and CGI has raised dividends by 6.6% annually over the same period.
So, if both rates of increase were sustained, which is not guaranteed, JAM and CGI would double investors’ income in less than 11 years. PSH does not have five years’ track record of sustained increases in shareholders’ income.
"Investment companies enable investors of all sizes to gain exposure to the biggest economy in the world. That means we can share the costs of professional fund management and spread the risks and rewards of the stock market that leads where others follow."
Finally, investors whose priority is capital growth might prefer the AIC North American Smaller Companies sector. There are only two investment companies here - Brown Advisory US Smaller Companies (BASC) and JPMorgan US Smaller Companies (JUSC), in which I am an investor. The former pays no dividends and the latter yields 0.65%.
Both have shrunk over the last difficult year, falling by 11% and 10%. But ten-year returns of 156% and 327% respectively should serve to remind us that every oak begins as an acorn – or, perhaps more appropriately, all American giant redwoods or sequoias start as seeds.
Investment companies enable investors of all sizes to gain exposure to the biggest economy in the world. That means we can share the costs of professional fund management and spread the risks and rewards of the stock market that leads where others follow.
Ian Cowie is a shareholder in Apple (AAPL), Canadian General Investments (CGI) and JPMorgan US Smaller Companies (JUSC)
