Funds in the Investment Association North America sector saw outflows of £700 million in July, the most in a single month in three and a half years, according to Morningstar Direct data. This is the third best-performing sector year-to-date, suggesting UK investors are taking profits and de-risking portfolios.
US equities have been the main driver of world equity markets so far in 2018, as emerging markets battle with trade woes, European growth continues to slow and Brexit clouds the outlook in the UK. The US economy continues to fly, with tax reforms benefiting companies and interest rates rising.
Global fund managers reported their biggest overweight to US stocks since January 2015 in this month’s Bank of America Merrill Lynch fund manager survey. It’s the first time in five years the US has been the most-allocated equity region.
And it’s no surprise. The average fund in the IA North America sector has returned 13.2% in the year to 15 August, behind only the IA Technology and Telecommunications and the IA North America Smaller Companies sectors. That return is almost double the next sector, IA Global which is up 6.8%.
However, retail investors seem less convinced the US equity bull market will continue. Of course, the US will be negatively affected by any escalation in trade rhetoric, too, with the Chinese making clear they will retaliate to any tariffs imposed by the White House.
Most generally believe we are late in the US economy’s cycle, meaning a recession could hit at any time in the next year or so. While others are bullish, we’ve already seen signs the upwards run in the S&P 500 – still running near record highs – can turn, with a 10% drop in just under two weeks having rocked investors in February.
Profit Taking
Taking some profits seems prudent, with just two funds out of 113 in the IA North America sector having lost cash this year. In the year to July, more than £2 billion had been pumped into such funds.
Two of the three most-sold funds in the sector in July were index trackers: BlackRock ACS US Equity Tracker and Vanguard US Equity Tracker saw outflows of £267 million and £87 million respectively. Both have seen double-digit returns in 2018.
The actively managed fund that saw the most outflows was Angel Agudo’s Morningstar Bronze Rated Fidelity American Special Situations fund. It’s returned 10% this year, but saw £223 million of outflows in July.
Despite a recent blip in performance – the fund has underperformed its sector year-to-date – Morningstar analyst Lena Tsymbaluk says the offering is a compelling option, with a talented manager who is backed by a well-resourced team.
But investors were still backing Baillie Gifford American, the overall best-performing fund this year with returns of almost 40%. It was the most-bought fund in the sector in July, with inflows of £111 million.
Overpriced US Stocks
We have heard from some fund managers who believe US stocks are still the place to be. However, others are more circumspect. They include Dan McNeela and Cyrique Bourbon, portfolio managers at Morningstar Investment Management.
While they view the risk of a full-on trade war as unlikely, they think US stocks are now overpriced. “And we believe selling overpriced assets is a good discipline,” they add. And that has nothing to do with macro fears. “We focus on long-term valuations – the true and durable value of an asset class, rather than its market price.”
They note that trade war fears have yet to weigh on US stocks, so there has been no attractive buying opportunity in the asset class. Over the past eight years, US stocks have rallied 15.3% on average per year.
“This long bull run has made US stocks pricey, we believe, so we’re expecting below-average returns from US stocks over the next five to 10 years,” they add.
The outflows from US equity mandates follows a pattern of de-risking from UK investors. Equity funds have seen net outflows of more than £7 billion in the past four months, with almost half of that number coming in July. Last month saw £4 billion withdrawn from UK-listed funds in total.
