Why every investor should consider US equities

Staci West (SW): Every investor should consider US equities — and I’m not just saying that because I’m biased to my home country!

The US stock market is the dominant player in town. It’s home to more than half of the global stock market and has been the world’s powerhouse in financial markets since the 1800s. Simply put, the market is too big to be ignored.

Over the past decade US larger companies in particular have been the darling of the investment world. Firms such as Facebook, Amazon, and Apple have become trillion-dollar companies, handsomely rewarding those that backed them.

But in 2022, when inflation soared and interest rates suddenly started to rise, the share prices of some of these companies fell. 

So, will the good times return and what are the different ways people can invest in the world’s largest market? 

Three professional investors give us their views. 

First up is Julian Cook, US equities specialist at T. Rowe Price, who says there are opportunities in large companies that are not so well-known. 

Julian Cook: 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.

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.

SW: Being such a dominant player in world stock markets, it’s perhaps no surprise to learn that the US market is also the most heavily researched – by economists, investors, analysts, and fund managers all around the world. 

Because so many people are scouring the market, it can make it notoriously difficult for investors to spot opportunities before they’re snapped up. 

Ben James, US Equities specialist on the Baillie Gifford American team now gives his view on whether index funds or actively managed funds are best for investors. 

Ben James: I don’t want to tell anyone how to build their portfolio, but there’s a difference between the way we invest and [how] a passive S&P 500 [index] tracker, how that will behave. Essentially, I think there’s a role for both active and passive investing in the US in people’s portfolios, but it just depends on your risk tolerance and what you’re trying to get. I do think in general, that the US as a country generates the most and best growth companies out there. It’s the most competitive, it’s the most innovative, it’s the deepest market in the world. So, personally speaking, and this is not advice <laugh>, I would hope that everyone has a small exposure, at least to some of the most innovative US large-cap growth companies. 

But what we do, is try and find 30 to 50 of the best growth companies – we call them the exceptional growth companies in the US – for the next five to ten years. And a lot of them aren’t in the index. So, we are very different to the index. So, if you take the S&P 500 as a sort of an example or as a representation of the wider market, we have an overlap of about 8%. So, our portfolio will behave very differently.

SW: But of course, the US isn’t just home to large companies. It’s also home to innovative growing smaller companies. 

Our final speaker is Cormac Weldon, manager of the Artemis US Smaller Companies fund.

Cormac Weldon: So, we think there is an opportunity to invest in US smaller companies, and it’s because first of all they haven’t performed very well in recent years and have become much cheaper than their history. So, there is a value argument to invest in US companies. But really the strongest argument and I, as a portfolio manager in this portfolio represent, is that there are a number of different types of opportunities that provide diversification for investors. 

So, one set of opportunities that we invest in is those that will benefit from all of the infrastructure spending, partly-funded by the government, but also funded by companies, which has been invested in domestic US and really US smaller companies are the best way of investing in those infrastructure themes. 

The other point is, and this is a common point for the US, is it’s still the most innovative economy in the world. It produces these wonderful companies, many of them that start as small and grow much bigger in technology and healthcare. And a lot of those companies have also become cheaper in the last 18 months or so. So today, as I look at my portfolio, I see that there’s lots of opportunity and lots of ways of benefiting from those themes I’ve talked about.

SW: Investing in funds, such as those highlighted in this video, gives access to specialist fund managers who invest solely in the US, day in and day out. These are managers with successful track records of finding opportunities, as well as the potential to perform well over the long term. 

With the lion’s share of the market, there are plenty of investment opportunities to add an extra layer of diversification in the US. Some would argue it’s impossible to have a truly diversified portfolio without holding some investments across the pond.