Australian investors can currently choose from among seven retail and wholesale dedicated North American share unit trusts (Table 1) and four recently-launched exchange-traded funds (ETFs). The seven managed funds have four underlying investment strategies, managed by US fund managers Fidelity, Marsico, and Massachu­setts Financial Services (MFS), while the final op­tion is run out of Sydney by boutique NavraInvest.

Barclays Global Investors has also recently listed four exchange-traded funds on the Austra­lian Stock Exchange which track the performance of US sharemarket segments. iShares S&P500 (ASX: IVW) follows the largest US companies, as represented by the S&P500 Index, while iShares S&P MidCap 400 (ASX: IJH), iShares MidCap 600 (ASX: IJR), and iShares Russell 2000 (ASX: IRU) track US mid-cap and small-cap stocks, respectively.

Table 1 shows that a number of the managed fund options have been in existence for some years now, but none has yet attracted any meaningful as­sets base. The largest at A$23.27 million is certain­ly nowhere near approaching the average diversified world share fund’s A$154.86 million size.

Fund Management

BT Investment – BT American Share and BT Wholesale – American Share, offered by Westpac Banking Corporation subsidiary BT Financial Group, have since mid-2006 been managed by MFS International, itself a subsidiary of Boston-based Massachusetts Financial Services. (The underlying investment manager until June 2006 was Putnam Investments – worth remembering when looking at how these funds have performed.) Unlike most of the other funds under discussion in this article, these are genuine ‘North American’ funds, investing in Canadian as well as US compa­nies.

MFS invests on a bottom-up basis, scrutinis­ing company fundamentals, rather than through implementing top-down views with broad sector or industry calls. The shop’s analysts and portfolio managers buy into 80 – 110 companies, analysing company and industry information from contact with company management, suppliers, competi­tors, consultants, and brokers. Characteristics MFS looks for in companies include being attractively-valued compared to peers and/or expected earnings growth, providing strong free cashflow generation, having improving fundamentals, and undergoing accelerating earnings growth.

The outcome of this approach was a portfolio whose major positions at 30 September 2007 included ExxonMobil (3.10 per cent of portfolio value); Bank of New York Mellon (2.20 per cent); Altria Group, the former Philip Morris, the tobac­co firm which also owns a chunk of brewer SAB­Miller (2.20 per cent); and the Danaher Corpora­tion (2.20 per cent), which designs, manufactures, and markets professional instruments, industrial technologies, and tools and components.

Fidelity America, launched in Australia in September 2005, is run by Bob Haber, a 20-year veteran of the shop and former portfolio manager for US mutual funds including Fidelity Focused Stock. Haber now works for Pyramis Global Advisors, a Fidelity subsidiary which undertakes institutional investment management. The fund’s universe is both US companies and companies listed elsewhere which derive a significant propor­tion of their earnings from the US, and there’s a tilt to investing in mid-cap stocks. Haber draws on both fundamental research by Fidelity’s army of analysts, and quantitative modelling of factors such as historical earnings, dividend yields, and earnings per share. Stocks which are thrown up by both processes make it into the portfolio.

The largest sector weights at 31 October 2007 were in Hardware (20.37 per cent of portfolio value), Industrial Materials (14.82 per cent), and Energy stocks (14.07 per cent). Haber’s principal stockpicks recently have included Cisco Systems (5.23 per cent); Hewlett-Packard (4.57 per cent); Agco, a manufacturer and distributor of agricul­tural equipment (4.24 per cent); supermarket chain Kroger (4.17 per cent); and health insurance provider Humana (3.04 per cent).

Marsico Large-Cap Growth, offered in Austra­lia through three Skandia funds, is run by Marsico Capital Management, a firm established in 1997 which manages approximately $US103.0 billion out of Denver, Colorado.

Founder Tom Marsico recently bought the firm back from Bank of America, a move Morningstar considers a positive development, given Marsico’s plans to offer equity in the firm as a way of retain­ing staff.

For the Growth portfolio, Marsico focuses on companies with specific expertise or dominance, durable franchises and pricing power, solid funda­mentals such as strong balance sheets and strong management, investing in 35 – 50 companies with these characteristics. Companies are selected primarily for their growth potential.

The largest shareholdings at 30 September 2007 included UnitedHealth Group (4.84 per cent of portfolio assets); energy company Schlumberger (4.79 per cent); Goldman Sachs Group (4.24 per cent); and two Las Vegas casino and resorts compa­nies, Wynn Resorts (4.04 per cent), and Las Vegas Sands (3.68 per cent), whose properties include the Venetian Hotel in Las Vegas; the Sands Macao casino; and the Marina Bay Sands, currently under construction in Singapore, and planned for opening in 2009.

Navra Blue Chip American Share is different to the other funds under discussion, for three reasons. First, it’s run out of Sydney by a local boutique fund manager called NavraInvest, established by Steve Navra in 2003, rather than having an on-the-ground presence in North America. Second, the investment process is substantially quantitative. Finally, NavraInvest’s goal is to generate a high proportion of return as income, rather than capital growth.

The approach centres on investing in the largest and most liquid US stocks. NavraInvest uses a proprietary quantitative system called ‘NavTraDE’, which generates buy and sell signals on the basis of share price movements. The shop then filters these opportunities using information sources such as annual reports, financial statements, and broker research, assessing factors such as solvency, sales growth, profit margins, and competitive position.

This translated into heavy investment in Industrial Materials stocks (27.20 per cent of the portfolio), other principal sector allocations being Healthcare (13.70 per cent), Consumer Services (13.68 per cent), and Financial Services (11.53 per cent).

Blue Chip American Share’s biggest stake at 31 August 2007 was Pfizer (4.03 per cent of the portfolio), while other favoured firms included home improvement retailer Home Depot (3.53 per cent) and Johnson & Johnson (3.46 per cent). The fund can also have a high allocation to cash: almost a quarter (22.54 per cent) of its assets at 31 Octo­ber 2007, for example. Like the other funds under discussion, Blue Chip American Share is unhedged.

Relative Performance

The North American specialty options have not been impressive performers relative to diversified world share funds. Figure 1 shows the average re­turns from the North American specialty options, and displays these alongside the category averages for retail and wholesale world large-cap blend, growth, and value funds for the same time periods.

Ongoing Costs

The average ongoing fee for the retail North American share funds – classified by Morningstar as those with upfront investment minimums of less than A$50,000 – is currently 1.95 per cent each year, while for the wholesale funds, it’s 1.22 per cent. This makes the annual cost for the retail North American funds essentially identical to the diversified world equivalent of 1.96 per cent, while the North American wholesale average of 1.22 per cent is slightly more expensive than the 1.09 per cent wholesale diversified world share fund equivalent.

Portfolio Strategy

Adding a North American specialty fund to a client’s investment portfolio wouldn’t add a lot of value. Most diversified international share funds are heavily invested in the region anyway. Relying on a North American fund for international exposure would also mean missing out on what are increas­ingly becoming the engines of world growth, the Asian and other emerging markets. Any role for a specialty North American fund would be as a satellite component, married to a diversified world share fund, and potentially also to either one of the diversified emerging markets funds, and/or one of the Asian specialty funds.

Phillip Gray is Morningstar’s Editorial & Communica­tions Manager. He can be reached at [email protected] He does not own units in any of the funds mentioned above.

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