Moon is bullish over the US’s prospects and says UK companies can benefit from the effects of improving employment data, its housing market and PMIs.
The manager says the energy revolution is the main driver of the economic recovery in the US, but at the same time it is being felt in different sectors. Because of that, he is using a number of stocks and sectors to play the recovery.
"There is an undeniable growth trend in the US," Moon said. "We are positioned to benefit from growth in the US, not just in oil and gas, but by focusing on general growth plays."
"We are going for cyclical plays, basically companies that will benefit from increased business activity."
This approach has paid off this year. Unicorn UK Smaller Companies’ high weighting to cyclical growth stocks has helped it register the second-highest returns in the IMA UK Smaller Companies sector over the past 12 months.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
It has returned 51.82 per cent over that time, beating its benchmark – the NSCI Numis Smaller Companies ex IT index – by more than 15 percentage points.
The manager admits it won’t all be plain sailing, however. Moon points out policy risk is still the major headwind facing the US as question marks remain over the tapering of QE, the fallout from the shutdown and the ongoing debt ceiling saga.
Nevertheless, Moon feels that the US will lead the global economic recovery and says his fund will continue to add value through his exposure to the country.
He told FE Trustnet about three stocks in particular he thinks will deliver the goods.
Porvair
Moon’s first pick is Porvair, which is listed on the FTSE Small Cap index and has a market cap of close to £120m.
The manager says he is using the fund to play the strength of US manufacturing, more specifically the pick-up in car sales and other areas of the automotive industry.
"It’s a company that focuses on specialist filtration systems, specifically the filtration of molten metals," he said.
"One of its major markets is the automotive manufacturing industry. In addition, 50 per cent of its revenues derive from the US."
According to FE Analytics, investors who bought Porvair shares three years ago would be sitting on a 250 per cent return. As a point of comparison, the FTSE Small Cap index has returned 52.95 per cent over that time.
Performance of stock vs index over 3yrs
Source: FE Analytics
The manager also points out that Porvair pays a small dividend, which is well covered.
Moon’s Unicorn UK Smaller Companies fund is the only portfolio in the IMA universe that counts Porvair as a top-10 holding. It is his fourth largest position, making up 4.1 per cent of his £20m fund.
Tyman
Next on the list is Tyman. It sits in the FTSE Small Cap index and Moon says it is a perfect stock to play the housing recovery in the US, because a large part of its revenue comes from across the Atlantic.
"Tyman manufactures and supplies products such as doors and windows," he said.
"This is a play on US housing transactions and new home start-ups. Its balance sheet hasn’t always been in the best of nick, but they have disposed of some of their non-core assets recently. Three quarters of their earnings are derived from the US."
"That is a bit of an estimate, but that figure had been 50 per cent in the past and it is increasing."
The company also specialises in weatherproof seals for both the door and window industry, which help to make homes more energy efficient.
The stock has by no means struggled recently, but its returns of 36 per cent over the last 12 months are actually lower than the FTSE Small Cap index.
Performance of stock vs index over 1yr
Source: FE Analytics
Tyman is not one of Moon’s top-10 holdings, but there are five portfolios in the IMA universe that count it in their top-10. One of which is the Standard Life UK Equity Unconstrained fund, which is headed up by Ed Legget.
Diploma
Moon’s final stock pick is Diploma and as it has a market cap of more than £760m, it is one of the only companies the manager holds that sits in the FTSE 250.
This is a real play on the increased business activity in the US as Diploma’s earnings stem from its work with the construction industry.
"Diploma is one of the largest holdings in the fund and they describe themselves as suppliers of high margin specialised technical products," he said. "That covers all sorts of things, but their largest division is hydraulic seals."
As the manager points out, Diploma focuses on an array of operations. However, he gives a more simplistic view of the company’s business model.
"Basically, if it’s big and yellow and moves earth in the US, Diploma can make money from it," he added.
Investors in Diploma have been well rewarded recently, with the stock returning 186 per cent over three years and more than 57 per cent over 12 months.
Performance of stock over 1yr
Source: FE Analytics
Given Diploma’s larger market cap, it isn’t too surprising that more funds own it than Tyman and Porvair.
All in all, seven IMA funds count it as a top-10 holding. These include the five crown-rated Schroder UK Smaller Companies fund, which is headed up by the FE Alpha Manager duo of Andy Brough and Rosemary Banyard, and FE Alpha Manager Richard Smith’s Invesco Perpetual UK Smaller Companies Equity.
