Land of opportunity

With the US election looming, Ian Cowie explores the North America sector.

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Whether Joe Biden or Donald Trump wins the American presidential election on Tuesday, November 5, history strongly suggests that economics will prove more important than politics for investor returns. The world’s biggest economy is also one of its most dynamic, delivering double-digit returns to shareholders in all but two of the 12 presidential election years during the last half-century, according to analysis by the fund manager American Century Investments.

Taking the Standard & Poor’s 500 Index as a broad measure of the United States’ markets, share prices increased by an average of 10% per annum during election years. That was despite the S&P 500 slumping by 37% in 2008, during the global financial crisis, and falling by 9% when the dotcom bubble burst in 2000.

It is important to beware that the past is not a guide to the future. However, history can provide a factual basis upon which to attempt to understand the present and, possibly, anticipate the future.

History is even more encouraging about years in which presidents attempted to secure re-election, as Biden does now. The S&P has never fallen during a re-election year since Dwight Eisenhower won in 1956 and the index delivered average annual gains of 18% during the 10 ballots when an incumbent has sought another term since then.

Cynics might suggest that sitting presidents are keen to ensure the electorate feel well-off before they cast their votes. But innovations - such as artificial intelligence (AI), which has boosted some big American technology shares to all-time highs - might provide a more substantial basis for rising valuations.

“The world’s biggest economy is also one of its most dynamic, delivering double-digit returns to shareholders in all but two of the 12 presidential election years during the last half-century.”

Ian Cowie

ian cowie

Never mind the generalities, how did these trends translate into investment trust shareholders' returns? According to independent statisticians Morningstar, the average North America sector investment trust achieved total returns of 40% over the last year, 157% over the last five years, and 255% over the last decade. By comparison, the average returns from all the AIC funds over the same periods were 13%, 92% and 167%.

Despite such sustained outperformance, American investment trusts’ shares continue to be priced at 21% below their net asset value (NAV). That discount means you can still buy £1 of underlying exposure to some of the biggest and best businesses in the world for less than 80p.

For example, Pershing Square Holdings (PSH) is the top-performer in the AIC North America sector over the last year and five-year periods with returns of 46% and 210% respectively. Launched in October 2014, it lacks a 10-year track record but trades nearly 27% below its NAV.

More than 90% of PSH’s $12.7 billion portfolio is invested in large capitalisation businesses, or those with shares worth a total of more than $5 billion. According to the PSH annual report, last month top holdings included the fast-food chain Chipotle Mexican Grill (CMG), the hotel group Hilton Worldwide (HLT) and the railroad Canadian Pacific Kansas City (CP).

Baillie Gifford US Growth (USA) ranks among the top performers in its sector over the last year with total returns of 41%, following 53% over five years, with no 10-year record. Underlying holdings are led by the Canadian online platform provider, Shopify (SHOP); the graphics processing units (GPU) maker, Nvidia (NVDA); and the online retailer Amazon (AMZN).

By contrast, my shares in Canadian General Investments (CGI) lag far behind with returns over the standard three periods of 14%, 70% and 181%. But I draw comfort from this investment company’s top 10 holdings being led by NVDA, including CP and AMZN, as well as the iPhone giant, Apple (AAPL). Despite such attractive assets, CGI continues to trade at an eye-stretching discount, 41% below its NAV. 

Looking forward, American smaller companies might also benefit from domestic stimulus in an election year. Certainly, my shares in JPMorgan US Smaller Companies (JUSC) have plenty of scope to catch up with their larger rivals, having delivered returns of just 7%, 37% and 155% over the usual three periods.

Either way, investment trusts provide British shareholders with convenient and cost-effective ways to access professionally managed portfolios of American shares. Investors should consider ignoring the political noise and instead focus on the economic opportunities

Ian Cowie is a shareholder in Apple (AAPL), Canadian General Investments (CGI) and JPMorgan US Smaller Companies (JUSC).