The notion that the US is grossly overvalued is a myth, according to Artemis’s Cormac Weldon (pictured), who says that sector-for-sector its valuation is comparable with most other global developed markets
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North America is currently one of the only major global markets that looks expensive across most valuation metrics compared with its 15-year average.
However, Weldon, who runs the Artemis US Equity and Artemis US Select funds, says this is due to the dominance in North America of “new world” growth industries – and that if you correct for sector differences, it is barely more expensive than the European market.
“Europe has got a lot more low-growth cyclical companies now,” he explained. “When you look at how tech is valued in the US versus Europe, or how industrials are valued, they are broadly valued in a similar way.
“We’re in a globally efficient market where money moves all around the world. If European tech was really cheap versus the US, investors would be selling the US and buying Europe.”
Weldon describes himself as “style agnostic”, refusing to commit to either a growth or value strategy but positioning his funds depending on what he thinks will work best in the current environment. For example, he moved into value stocks in 2009 when he was at Threadneedle, noting this area of the market was “absurdly cheap”, while he is currently overweight quality growth businesses.
Instead, the manager said the most important feature of his strategy is balancing the risk/reward payoff, which he tries to ensure is at least 2:1 in favour of the latter.
He used the example of Netflix to illustrate how this works in practice.
“We have never owned Netflix, even though we could see that if things went really well, there was plenty of upside,” he explained.
“We saw risks in the Netflix story, which meant we thought there was also downside. So we stayed away from it, in favour of stocks where we thought there was a better risk/reward.
Performance of Netflix over 5yrs
Source: Google Finance
“And it’s not to say that we’re right or wrong on Netflix. It’s just that’s our process.
“And, you know, maybe those risks are now starting to manifest. You’ve got Disney pulling their content. I forget who owns Friends, but they’re pulling [it].
“I was stunned that people are still watching Friends, but there you go.”
It is not just high valuations that are giving investors cause for concern about the US at the moment. Shorter-term Treasury yields have recently moved higher than their longer-term counterparts and this inversion in the yield curve often precedes a recession. However, even though Weldon invests further down the market cap scale than most of his IA North America sector peers – an area that tends to do worse when there is a major correction – he believes his fund is well positioned for any economic shocks.
“The question ‘is multi-cap the right place to be?’ depends on what stocks you own,” he continued.
“Just because we’ve got some smaller companies it doesn’t necessarily mean they’re much higher risk, they might have much better balance sheets, much better business prospects.
“But we don’t own any big oil, we’re underweight very big banks and we’re underweight some of the very big industrial stocks. So, if we’re going into recession, we’d be very happily underweight all of those things.”
An obvious question when speaking to a US manager is “why not invest in a tracker?” due to the small number of funds that consistently beat the S&P 500.
Almost without thinking, Weldon replied “because we can do better and we have done better”. And the data backs up his point – the Artemis US Select fund has made 137.1 per cent since launch in September 2014 compared with 109.96 per cent from the S&P 500. He said he has also beaten the Russell 2000 index “by a mile” (it is up 85.76 per cent over this time) and sounds almost disappointed that it hasn’t given him more competition.
Performance of fund vs sector and indices since launch
Source: FE Analytics
“Just to be clear, the Russell 2000 is a pretty poor measure of US smaller companies,” he said. “I think about 30 per cent of the companies are loss-making now, there’s an awful lot of them that are very indebted.
“So, in this sort of market, where it’s been a quality growth market, it hasn’t been that difficult an index to beat to be frank with you.
“I think we have demonstrated that you can assemble a really high-quality portfolio of good predictable companies. You don’t have to go in the garbage bucket, which is where a lot of Russell 2000 companies are.”
The manager also said he finds that it helps being stuck between two countervailing forces – at one end, index funds “buying companies in the same proportion every day”, while at the other a large and overly active hedge fund community that is short-term in nature and becomes obsessed with single data points, leading many of them to sell out of entire positions on any disappointment.
So why does he think so many of his peers struggle to beat the US market? Weldon said it goes back to his point about being flexible in his approach.
“Some of it, frankly, is this obsession with style investing,” he added. “If you’re not open to buying a certain part of the market, it just makes it more difficult. I don’t know why people do that.
“It’s like going into a fight with one hand behind your back.”
Artemis US Select is £1.3bn in size and has ongoing charges of 0.87 per cent.