Navigating the turbulence under Trump

With the US stock market close to correction territory – the S&P 500 Index is down almost 10% since its mid-February high – you might think that investors are facing a sea of red. However, the sell-off has seen both winners and losers.

The previously stellar performers of the technology sector, for example, have suffered significant setbacks; Nvidia shares, say, are down roughly 17%. By contrast, defensive sectors such as food, pharmaceuticals and utilities are holding up; American Water and Merck, for instance, have both gained about 10% in recent weeks.

It's a reminder that stock market indices are just an aggregate of the share price performance of enormously varied groups of individual companies. The Trump administration’s policy announcements – which are the main reason for this latest bout of US market volatility – naturally impact those individual businesses in very different ways. US steel manufacturers, to take just one example, are bouncing strongly on the President’s decision to impose tariffs on imports of steel from their international rivals.

So how do investors navigate such uncertainty and volatility? Well, the first point to make is that actively managed funds can show their true value in these market conditions. The US stock market, more closely followed and analysed than any other global market, is often talked about as a place where tracker funds make more sense, because beating the average is difficult when everyone knows everything about what’s going on. However, active managers are able to adapt their holdings to capitalise on prevailing market trends, whereas passive funds simply follow the market blindly up and down.

The variety of actively managed funds on offer in the investment trust universe is a case in point. On the one hand, you have a fund like North American Income, which has traditionally focused on dividend-paying companies, and has sizeable exposures to blue-chip companies such as Johnson & Johnson, Chevron and Bristol-Myers Squibb. On the other, there is JPMorgan American, which has built much larger holdings in the technology sector.

Not surprisingly, those funds have fared very differently. JPMorgan American has returned twice as much as North American Income over the past five years, courtesy of those technology stock holdings. Looking at the last year alone, on the other hand, North American Income is more than 12 percentage points ahead of JPMorgan American due to its more defensive slant.

The point here is not to recommend one of these trusts over the other. Rather, their divergent performances underline the opportunities that investment trusts offer for investors looking for exposure to North America. Depending on where you think US equities will go next, one or other of these funds will have much greater appeal.