Amazon.com and Apple have contributed significantly to the outperformance of UBS US Growth this year. These American giants keep winning - however poor the outlook in Europe.
Tech bias keeps Americans on top
It’s striking how many American funds are becoming, in effect, tech funds. Take a look at the UBS US Growth fund. It has more than a third in tech, yet that is only a mildly overweight position compared to the overall American market.
Many stocks that British investors would classify as tech are defined otherwise in America. For example, many would think of Amazon.com as a technology company, but on Wall Street it is classified as a consumer discretionary stock and is not in the IT sector. The same goes for Priceline, the online hotel and travel booking company.
Apple, of course, now dominates the American market and is classified as a tech stock. It has pulled back from its early April peak of $636 but, given the decline in markets globally, its fall to around $577 this week is relatively gentle.
Apple is the single largest holding in the £95m UBS US Growth fund, at 7.5% of the portfolio. (Collinson continues below)
Grant Bughman, who is part of the New York team that looks after the fund, says it has trimmed some of its exposure but he is still a huge fan of the company.
“We have owned Apple since it was $37 a share. We have actively added along the way, especially in January [when it was trading at $400-425] but we have trimmed the holding back a couple of times since then,” he says.
But Apple has not been the biggest contributor to recent outperformance of the fund. That honour goes to Amazon. UBS US Growth is first quartile over both one and three years (it was only launched in November 2008), with the fund up 12.6% over the past 12 months compared with the average 7.4% gain for the sector. However, much of the sector’s performance is to do with currency movements against the dollar. Sterling is down from about $1.65 a year ago to $1.55 today.
The UBS fund is unhedged, and Bughman says that UBS detects little interest among clients for a hedged fund.
Amazon’s share price graph is nearly as impressive as Apple’s. It was trading at below $50 less than three years ago but is above $220. It has withstood much of the recent market sell-off, trading close to its $235 peak. Earnings and revenues continue to outstrip expectations and at nearly 5% of the UBS fund, it is a key driver of recent performance.
That said, I have stopped using Amazon following recent revelations that despite sales of £7 billion in Britain, it pays no corporation tax. It’s not just unfair competition for other retailers. When governments are so heavily indebted, claims by Amazon that it’s just a Luxembourg company won’t be accepted for much longer by the tax authorities. Today Jimmy Carr, tomorrow Amazon.
Amazon forms one of the fund’s ’elite growth’ stocks. Bughman divides the 45-strong portfolio into three silos - elite, classic and cyclical.
The elite stocks are high-growth, high-expectation companies trading, inevitably, on high multiples. UBS says it is prepared to look through those valuations and accept that they reflect huge growth potential.
‘Classic’ stocks make up most of the portfolio. “They are mostly mature, highly-liquid companies, which usually trade close to fair value,” says Bughman. “They are the anchor to the portfolio, with good free cashflow and attractive dividends. We use market noise to buy these stocks when they are cheap.” He points to McDonald’s and Nike as examples.
Cyclicals make up the smallest part of the portfolio, just 5.5%, largely because of UBS’s caution on economic growth.
”We have owned Apple since it was $37 a share”
Banks feature nowhere in the portfolio. “We have been underweight cyclicals for a year, largely because of the problems with European banks. We don’t own any financials as consumers are deleveraging, regulation is getting more burdensome and banks need to raise more capital.”
But UBS is also trimming its exposure to elite growth stocks. Bughman cites Las Vegas Sands, the casino operator, which the fund holds less for its American operations and more for its vast casinos in Macao and Singapore. It owns the Venetian, the biggest casino in Macao and the fifth-largest building on earth.
After enjoying a run from $22 in 2009 to $60 in April, the stock has fallen heavily to about $45 today. “We sold a significant portion of the holding in early April and it declined dramatically afterwards,” says Bughman.
It’s interesting how much of Sands’ income stream comes from outside America. Bughman reckons that 35% to 40% of the revenue of American large cap stocks comes from overseas earnings.
Another of the fund’s holdings, Priceline, generates 60% of its revenue from Europe, although Bughman is keen to stress that overall the fund’s exposure to the continent is low.
After a mild rally reflecting hope that Europe may be getting its act together on Greece (and Spanish banks and Italian government debt), the American stockmarket lost its nerve and fell heavily again at the end of last week. On Thursday, the Dow Jones slid by 1.96%, while the tech-heavy Nasdaq was down 2.44%.
Many closely watched economic indicators are disappointing investors. Manufacturing activity is weakening, according to the Philly Fed index. Home sales fell in May, says the National Association of Realtors. Overall economic growth may come in below 2%, adds the Federal Reserve - sharply down from the 2.4% to 2.9% it was projecting earlier in the year.
A wall of tax rises and spending cuts will come into force at the end of 2012, which could, some economists warn, throw the economy into a double-dip recession.
But it’s easy to max out on gloom. And that’s distinctly un-American. Oddly enough, it may benefit investors in American funds. Every time the European picture worsens, the dollar climbs. And every time the European picture brightens, the outlook for America’s global giants, such as Apple and Amazon, gets much better. It’s almost a win-win.
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