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Despite higher risks, the U.S. is an important part in a portfolio
For the last several years, American equities have been the go-to investment for many Canadians. U.S. stocks, beaten down so badly after the recession, were inexpensive, while the nation’s economy was rebounding in a big way, which helped its equity markets. Over the last five years the S&P 500 has climbed by 62% compared to 6% for the S&P/TSX Composite Index.
While the U.S. is still a bright spot among developed nations—the IMF is expecting 3.2% GDP growth this year, better than Canada and Europe—it’s not the no-brainer nation that it once was, says Colin Wong, co-manager of Mawer Investment Management’s five-star Morningstar rated U.S. Equity Fund. He thinks the country is showing some cracks: its high debt load is approaching record levels and uncertainty around rising interest rates, especially the impact that will have on corporate debt, is a concern.
Still, there’s so much more to choose from in the U.S. than in Canada and many sectors, like health care and technology, are far more robust down south. Wong, who has slightly reduced his exposure to the U.S., is still finding many opportunities there. The key, he says, is to pick businesses that can withstand shocks to the system. “You have to walk a little slower than you otherwise would.”
Wong is a bottom up investor, so sectors don’t matter as much to him as company fundamentals, though his portfolio does have a higher concentration of financials, information technology and consumer discretionary stocks. More importantly, he wants a U.S. business with little or no leverage today, so when rates rise again these companies won’t be affected. He’s also interested in operations that are making money now, versus ones that are promising big profits in the future (like what you might find in Silicon Valley).
Wong wants a return potential of about 3% to 5% higher than the government bond rate, which puts him into the 5% to 7% annual return range. That’s easier to find now, but if rates rise it could get more difficult, he says. Credit card companies, such as Mastercard and Visa—“they have no balance sheet, they just make money when you order a coffee,” he says. Auto parts companies meanwhile make replacement parts for many different types of vehicles. These attributes make these sectors attractive to professionals like Wong.
Despite some increased risks, the U.S. can still play an important part in a portfolio. It has some of the most innovative and entrepreneurial companies in the world, and historically, U.S. equities have delivered some of the highest equity returns in Canadian dollar terms, says Wong. “All of this,” he says, “still makes the U.S. a fruitful place to invest.”
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