Are US large caps a good investment today?

I’m Staci West from FundCalibre, and today I’m joined by Julian Cook, portfolio specialist for the T. Rowe Price US Large Cap Growth [Equity] fund. Julian, thanks for joining us today.

[00:12] Thanks for having me.

Now, last year was a brutal one for US large companies. Why this spectacular fall from grace? What

happened?

[00:23] Yeah, well, I think we really have to go back to November 2021. And it was really the change in the market environment of higher inflation and higher interest rates that caused a significant rotation – particularly between growth and value companies in the US – but also had a detrimental effect on overall market levels. Now, some of those inflationary influences were initially thought to be more kind of transitory and sort of temporary in nature. I think as we’ve seen as our experience in the UK also, that is actually taking a little bit longer to feed through the system, [ie. with] wage negotiations, you know, teachers on strike, you know, rails on strike. So, that’s taking a longer while to filter through all elements of the economy. And I think once it became apparent that inflation was sort of hanging around for a bit longer, and interest rates were going to be staying higher for longer, then that really, I guess, you know, led to a sort of a change in attitudes towards the US equity valuations and was essentially ultimately detrimental to market levels.

And this fund has 45% in IT. So, what gives you this level of confidence in the sector?

[01:42] Yeah, yeah, well, I guess just to be clear, at T. Rowe Price, we don’t wake up in the morning and decide, ‘We want to be overweight in IT, what do we buy?’ We basically select companies on a stock-by-stock basis. And so, every single tech company holding that we have, reflects our confidence in the materiality and the likelihood of that materiality coming to pass in that particular company. So, we’re trying to, I guess, find companies on a stock-by-stock basis that look really, really attractive to us. And as it turns out, when we look for growth companies in the US, we’re looking for companies where we can find growth in excess of, you know, 14% nominal. So that’s real [growth] plus inflation, and we find lots of those opportunities in technology, quite frankly.

So, we’re trying to position ourselves today for the exit of the next recession. We think we’re getting a recession in the US. And our technology companies we hold today, we think look super attractive on a two-to-three-year view. Now, whether it’s going to be the ideal moment in time in the next six months in terms of the owning that company, you could still be a little bit offside if you do get a recession, and obviously that’s our core thesis.

But on the two-to-three-year view, a lot of these technology companies to us look extremely well positioned, look very strategically important to their customers and, most importantly, self-financing from a free cash flow perspective. So, we’re not buying profitless IT companies in this strategy; we’re finding really strategically important companies that have, you know, great free cash flow to support their valuations as we look out two, three years.

Perhaps [on] slightly longer time horizon, are there other areas that you think could be winners of the next decade? Or are you still considering tech for that time horizon as well?

[03:38] Yeah, so when we look at the market in the US, we really find growth companies in four main areas. So, obviously we can find them in IT, but also, let’s not forget, you can find some great growth companies in healthcare. Healthcare is actually one of our biggest overweights relative to our benchmark. You can also find growth companies in communication services and also in consumer discretionary. So, out of those four areas we tend to find growth companies there. So, I’d say healthcare would be a name, an area – I beg your pardon – a sector where we still have great expectations of that area of delivering good results to the clients.

And Bank of America recently said that they’ve seen the biggest rotation out of US equities in a decade. Do you think that it’s a mistake for investors to leave the US now?

[04:35] Well, let’s look back. I mean, you know, the US has been a very successful place to invest, certainly over the last 10 years. So maybe not surprising that some are looking to allocate away from the region. 

I think the attributes of the US, however, shouldn’t be overlooked. Now the main, for me, the main attributes of the US market are; very deep capital markets in private and in venture capital; world-leading innovation; [the] largest single, domestic market globally, with a pro-business culture. Now, all of those elements, I think give you lots of good reasons to consider the US as an investment. 

I think it’s possibly a little bit too cute maybe to time exactly when you can be out and when you can be in, but I think as a long-term investor looking to get exposure to, I think what are a pretty unique and un-replicatable set of attributes, the US still looks like a very, very good place to invest money.

And perhaps we can wrap up with a few of the lesser-known names in the portfolio. And then maybe just give viewers an idea of how large these companies are, in comparison to perhaps a UK large cap that people may be more familiar with.

[05:55] Yeah, certainly. So, I mentioned healthcare a moment ago. You know, one of the names that we own in healthcare is in the health insurance [sector], is a company called Cigna [Cigna Insurance Company]. And Cigna … I mean, if you think about… we’re insured by Cigna at T. Rowe Price, right, so, if I need to go to the physiotherapist, whatever, I can go and claim on my Cigna insurance. What makes Cigna to us a really attractive business is, it’s a short-cycle insurance business whereby you can change the premiums that you charge on an annual basis. If you get your underwriting wrong, you can correct and you can change the benefits, you can change the deductibles, you know how much co-pay [a fee that you pay when you receive healthcare services] is there. So, lots of sort of buttons and levers you can press in terms of…  buttons, levers you can pull, to change the underwriting of that business, and you can reprice and maybe hit your desired level of growth.

This is a company which is a hundred billion dollars in market cap. It employs like 75,000 people. If it was in the FTSE, it would be in the top 10. And so, maybe that’s surprising for some of your audience out there, that there’s a company they may not have heard of, which could easily make it into the top 10 in the FTSE. 

Another company we have in business services, is a company called Fiserv. Fiserv [Fiserv, Inc.] is in like the transaction processing, electronic bill payments, business process outsourcing. That again would be in the top 10 in the FTSE. It’s about a 67 billion dollar market cap company, [and is] a company we think can generate very decent growth durably, year in, year out, above that 14% hurdle growth rate that we set ourselves. 

So, when I think about the US, I see opportunities in companies like these that may not be necessarily sort of household names to people sitting here in the UK, but are very well-established, you know, very successful businesses you know, very reasonable valuations we’d say, and very significant market cap sizes to boot.

Well, thank you for those examples. That’s great. I think it will be quite a shock that companies you’ve never heard of are so large <laugh>. But that’s been a great update. Thank you very much, Julian, for joining us.

[08:10] Thank you very much. Thank you.

And for more information on the T. Rowe Price US Large Cap Growth [Equity] fund, please visit FundCalibre.com And don’t forget to like and subscribe below for more interviews.