24 May 2016
The US spent $3,000 billion on healthcare in 2014. Where did it go?
We chat with Robert Kaynor, director of US mid- and small-cap equities at Schroder
As employment nears capacity, wage inflation is now one of the most important things for continued improvement in the US economy, according to the managers of the Elite Rated Schroder US Mid Cap fund.
However, what little wage inflation there has been hasn't yet fed through into spending, especially in consumer discretionary. One reason for this is that healthcare costs are increasing. The US spent more than $3,000 billion on healthcare in 2014 and the bill is rising. As a consequence, healthcare deductibles have increased. But this doesn't fully account for the lack of spending.
Another theory, but by no means any more conclusive, is that purse strings are being tightened with the election looming. It is another excuse for companies not to spend or to delay spending due to the uncertainty.
With interest rates remaining stubbornly low and economic growth painfully slow, investors are still being forced to take on more risk to make returns on their savings. This has made the stock market more expensive, particularly at the mega- and large-cap end of town as investors have piled into stocks that are considered relatively 'stable'. So fund managers looking for growth potential have been moving further down the mid- and small-cap scale.
The US stock market is notoriously difficult to outperform consistently and often, and it is by focusing in these smaller and medium sized companies that many managers have the most success over the long term.
A big theme at the moment is the return of first-time buyers to the US housing market. House price inflation is above wage growth inflation, which is a concern, but there are ways of making the most of the opportunities.
For example, the fund is buying into a shared housing company to play the housing rental increase theme. Smaller companies specialising in things ranging from pest control to roofers are also a great way of playing the sector. And with birth rates increasing for the first time since the recession, there is another longer-term key driver supporting the house building industry.
Run out of New York by Jenny Jones and her team of analysts, the Schroder US Mid Cap fund has a small and mid-cap focus and aims to beat its index by 2%–3% per annum. The investment process is underpinned by in-depth stock level analysis, which has led to superior stock selection, and this has driven performance.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Robert's and Jenny's views are their own and do not constitute financial advice.