M&G American Fund finds cause for celebration in US market

As independence day approaches on 4th July, Aled Smith, manager of the M&G American Fund finds cause for celebration in the US market by focusing on bottom up stock selection.

On the 4th of July, Americans will be commemorating US independence with star-spangled flags, fireworks and street parades. However, as economic slowdown continues to cast a cloud over the stockmarket and the Fed grapples with inflation, should investors in US equities be joining in the celebrations?

Aled Smith, the Citywire A-rated manager of the £1.1 billion M&G American Fund, finds cause for celebration in the US market by focusing on bottom-up stock selection, using return on capital as the key measure of corporate performance.

"As a stockpicker, my expertise lies in understanding individual companies, not making a judgment on the economic environment. My aim is to back management teams that share our philosophy of shareholder value creation, where the potential for improving returns or high sustainable returns are not appreciated by the broader market. You have to look beyond the market noise."

With an investment universe of around 5,000 US companies there are always companies to be found that are taking positive, value-creating measures. The market is often slow to recognise these measures, creating a window of opportunity which Aled aims to exploit to create value for the fund.

Aled continues: "Companies that are prepared to make necessary internal changes, take advantage of external developments or put in place successful R&D initiatives can make rewarding investments as return on capital improves. In addition, undervalued business franchises - quality companies that are already generating high returns in excess of the cost of capital, but where this value creation is under-appreciated by the market - provides a further source of fund performance. Crucially, an investment strategy focused on these differentiated characteristics can reward investors throughout the economic cycle."

Two companies displaying improving returns on capital include:

Methanex, the world's largest methanol producer, is a leading player in a consolidating industry and its management has shown excellent capital discipline in reducing inefficient capacity and focusing on areas of low-cost production. Despite a favourable background of rising demand and limited supply, the market has yet to appreciate the value of Methanex's asset base, making the company a very attractive investment opportunity for the M&G American Fund.

BorgWarner, the world's biggest maker of automatic-transmission parts, is a leading supplier of engines and drivetrains that increase fuel efficiency and lower emissions. Car manufacturers are facing increasingly stringent regulatory controls and pressure to increase fuel efficiency and reduce emissions. Being the market leader in these areas bodes well for future demand for BorgWarner products. BorgWarner's track record and its backlog of orders signal that the company's rating will improve despite the market's pessimism reflected in the share price.