A fund for US recovery: AXA Framlingon American Growth
It seems the US economy is back on track. Recent data from the US Department of Commerce shows consumer spending picking up and house prices recovering.It is no surprise the US market has powered ahead in response. Yet companies faring best have, perhaps counter-intuitively, been in more defensive areas such as consumer staples and utilities; it appears investors are prepared to dip a toe in equity markets but still want to retain a margin of safety.
These areas of the market have now grown more expensive with share price appreciation far outstripping growth in earnings. It has been a headwind for the relative performance of funds focused on more growth-orientated stocks such as AXA Framlington American Growth. Yet if the US economic revival takes off in earnest there could be opportunities amongst those left behind. I recently caught up with Dan Harlow, secondary manager of the fund, to learn more.
Mr Harlow, along with Steve Kelly, the lead fund manager, focuses on finding companies with an established growth trajectory. They aim to spot consistent improvements in company revenue, and like to see a good portion of earnings reinvested sensibly in the business. An example in the portfolio is American Tower, which constructs and rents out mobile phone masts. Mr Harlow explains the firm generates a large quantity of cash from mobile phone carriers. As mobile coverage becomes more comprehensive, both in the US and internationally, the business is well placed to increase future revenues by building more infrastructure now. Although this reduces profits in the short term, it should be beneficial in the long run.
The managers' approach means the fund tends to be biased towards medium-sized firms as these have greater scope for growth. There is also a bias towards certain sectors, notably healthcare and technology. Being innovative industries there are many opportunities for rapid expansion, and the managers have the valuable inputs of Jeremy Gleeson, manager of the AXA Framlington Global Technology Fund, and Gemma Game who manages AXA Framlington Health Fund. Technology accounts for around 30% presently, including Salesforce, a fast-growing company specialising in Customer Relationship Management (CRM) software designed to help companies manage customer and sales data. Healthcare represents 14% of the fund and includes three holdings in biotechnology.
Large, defensive stocks such as Coca-Cola and Colgate-Palmolive are largely absent from the portfolio. The managers appreciate these consumer giants have exciting opportunities to grow in emerging markets, but believe these represent only pockets of growth. The bigger picture they insist is moderate growth in the already-saturated markets of the West.
Interestingly, the pair are finding some of the best opportunities among domestically-orientated stocks. For instance, rather than the more widely-held McDonalds or Yum! Brands (which owns KFC), they particularly favour Chipotle Mexican Grill, a firm that owns a chain of Mexican Restaurants growing strongly in the US and Europe. Again the key characteristic is the ability to grow from a smaller base.
Overall, it means the fund is positioned differently from many of its peers. Typically, it is more volatile than the sector average, and investing in smaller stocks makes it higher risk. However, I believe this approach better captures the entrepreneurial and dynamic spirit of the US and it remains part of our Foundation FundList of favourite funds.
By Rob Morgan, Pension and Investment Analyst at Charles Stanley Direct.