US companies can lock-in future growth by putting capital to work but efforts must kick off now while the economy is in a relative sweet spot, Citywire AA-rated Ian Heslop has said.
In an update for the Old Mutual North American Equity fund, Heslop, who is named manager across several funds at the group, said the economic recovery of the US is clear but so are potential headwinds.
‘While optimistic on the economy, my only real concern is that the rate of corporate investment spend needs to increase. Companies are still in the “let’s return cash to shareholders” mind-set, rather than “let’s invest in plant and machinery mentality”,’ he said.
Heslop, who co-runs the £864 million (€1.2 billion) fund with Amadeo Alentorn and Mike Servent, said there were healthy levels of purchasing going on but very little internal strengthening, which needed to be addressed.
‘If ever there was a sign of confidence returning to the US economy it’s in the escalating value of M&A deals. In May alone these totalled a staggering $243billion, which if this rate continues could well top 2007’s record,’ he said.
‘If management didn’t believe the economy was stable they wouldn’t be committing such large amounts of cash to buying other businesses, surely? And corporates are right to be optimistic.’
‘The US economy is one of just three to experience self-sustaining growth in 2014 – the other two being India and the UK. Corporate margins are nearing 50 year highs and, unlike many, I see no reason for them to revert to the mean given the double tailwinds of a fall in oil prices and advances in technology.’
Beware sudden style shift
Heslop said this positivity could soon be reversed if the market experienced a significant swing in investment style, most likely coinciding with the Federal Reserve finally raising rates.
‘As most US equity investors will know from bitter experience the rotation from growth to value, and back to growth could change anytime soon. The recent correction in global bond markets suggests that point may not be too far away.’
‘While style volatility has been less pronounced in the US than Europe that’s not to say it doesn’t exist. Watch this space. The trick is, as ever, to keep alpha returns diversified.’
The Old Mutual North American Equity fund has returned 20.3% in the 18 months since the Dublin-domiciled fund was taken on by Heslop and his team. This is inline with performance of the S&P 500 TR over the same period.