Surfing stateside
Ian Cowie on the enduring appeal of the world’s largest stock market
American stock markets surged to a nine-month high at the start of June after the Senate passed a bill to raise the ‘debt ceiling’ on government spending and avoid potential default. This deal will run until 2025 and should avoid similar brinkmanship over fiscal policy before next year’s presidential election.
But many British shareholders may have mixed feelings about good news from the world’s biggest economy because it reminds us how much better investors have done in America than here in recent years. As of 8 June, the Dow Jones index of Yankee blue chips has risen by 1.6% in the year to date, Standard & Poor’s broader measure of US shares is up 11.6% and the Nasdaq technology benchmark has rebooted 26.2% higher. But the FTSE 100 index of Britain’s biggest businesses is virtually flat at 0.7%.
More meaningful five-year figures show increases of 33%, 54% and 71%, respectively, in New York. Meanwhile, London’s leading stock market index is nearly 1% lower over the same five years.
Fortunately, investment companies bring the world within reach and make it cost-effective for shareholders of all sizes to participate in the growth and income that can be generated by American equities. One reason to consider doing so is that US shares represent over two thirds (68%) of the value of all the shares on this planet, according to the Morgan Stanley Capital International (MSCI) World Index. By contrast, British shares account for just under 4.4% of the MSCI World Index.
“Seven investment companies in the AIC North America sector delivered average total returns over the last decade, five years and one-year periods of 208%, 110% and 6% respectively, according to independent statisticians Morningstar."
Never mind the macroeconomics, what about shareholder returns? Seven investment companies in the AIC North America sector delivered average total returns over the last decade, five years and one-year periods of 208%, 110% and 6% respectively, according to independent statisticians Morningstar. By contrast, the UK All Companies sector average returns were 103%, 6% and 3% respectively.
Pershing Square Holdings (stock market ticker: PSH) leads the North America sector over the last five-year and one-year periods with total returns of 154% and 11% respectively. Launched in October 2014, PSH lacks a ten-year track record but its biggest underlying holding, the self-descriptive Universal Music Group, hit the headlines last month with a rumoured $1 billion bid for the back catalogue of the rock group, Queen.
While PSH manager, Bill Ackman, could be forgiven for humming “we are the champions” over the short and medium terms, JPMorgan American (JAM) leads the sector over ten years with a total return of 287%. Sad to say, there has been rather less jam recently with five-years and one-year returns of 91% and 4% respectively.
Canadian General Investments (CGI) ranks third in this sector and closer to my wallet, because I am a shareholder. CGI’s total returns are 208%, 58% and minus 3% over the three standard periods. CGI’s biggest underlying asset is the microchip maker, Nvidia, whose stock market value recently exceeded $1 trillion, albeit briefly.
“North American investment companies continue to trade at an average discount to net asset value (NAV) of 27%. That’s more than double the average discount across all types of investment companies.”
Despite all that, North American investment companies continue to trade at an average discount to net asset value (NAV) of 27%. That’s more than double the average discount across all types of investment companies, excluding Venture Capital Trusts (VCTs), of 12%.
More specifically, PSH shares are priced 34% below their NAV, while JAM trades at a modest 3% discount and CGI is priced 36% below NAV. Income-seekers will note that PSH yields 1.5%, JAM pays 0.96% and CGI distributes 2.8% dividend income.
There are only two investment companies in the AIC North American Smaller Companies sector. Brown Advisory US Smaller Companies (BASC) has delivered the biggest total returns over the last five-year and one-year periods, with 23% and 4% respectively.
But BASC’s 83% return over the last decade is soundly beaten by JPMorgan US Smaller Companies (JUSC) ten-year return of 207%. As I have been a JUSC shareholder for longer than that, this is some comfort for its weaker medium and short-term returns of 22% and minus 3% respectively.
“I recently bought some FCIT shares for my grandson, Charlie, when he was born last year; just as I bought some FCIT for my son, Joe, long ago.”
You don’t need to hold shares in the AIC’s North American sectors to gain access to the world’s biggest economy. Some investment companies in the AIC’s Global sector have substantial exposure, such as Alliance (ATST) with 55% of its assets in America, and F&C Investment Trust (FCIT), which has 53% there. Full disclosure, I recently bought some FCIT shares for my grandson, Charlie, when he was born last year; just as I bought some FCIT for my son, Joe, long ago.
Less happily, it would be wrong to overlook the failure of three American banks this year – Silicon Valley, First Republic and Signature – or the political risks that remain associated with the presidential election in November next year. But medium- to long-term investors should consider some exposure to an economy that leads the world in important stock market sectors, such as healthcare or information technology, and looks likely to continue doing so.
Ian Cowie is a shareholder in Canadian General Investments (CGI) and JPMorgan US Smaller Companies (JUSC).
