As I write, it hasn’t even been a week since we found out that Donald Trump would serve as the 47th President of the United States. Indeed Mr Trump won’t even take up his new position until January and yet the complexion of the markets has changed completely.
Negative sentiment has disappeared from US equities and there are more than 20 large-cap US stocks that have added 20% plus over the last week. Eight of these have added more than 40.00% in that time frame.
If you were lucky enough to have any of these stocks in your portfolio, then well done you.
Stock picking can be hard
Picking individual stocks is a fascinating, but time-consuming process and one that often requires a degree of knowledge and expertise that most retail traders and investors just don’t possess.
That’s particularly true when it comes to investing and trading in overseas equities. And that goes some way to explain the growth in, and popularity of, collective investment schemes, such as ETFs and mutual funds.
Many of these ETFs and mutual funds passively track overseas equity indices, and sector benchmarks, or are actively managed by experts in their fields.
This type of investment products allow investors and traders to quickly make asset allocation decisions, and as such they provide private clients with a way to play big-picture thematic ideas.
As we noted the landscape of the US equity markets has changed completely, in a matter of days. As part of that process, strategies and styles that were out of favour are now back in vogue.
Value is now seen as likely to outperform and growth and small caps are once again seen as offering significant opportunity.
The term Small cap is relative of course when we talk about US equities because companies that would sit comfortably in the UK FTSE100 can fall under this designation.
Underperforming but rapidly improving
US Small caps have underperformed the wider market year to date, the S&P 600 index has lagged by more than -10.0% for example, and, over the last two years, the gap has widened to approximately -26.0%, quite a shortfall.
With sentiment on the turn now could be the time for Small caps to play catch up. Indeed over the last five days, the S&P 600 index has added + 9.40%.
However, that could be just the tip of the iceberg, because the performance gap between the S&P Small Cap index and the S&P 500 extends to -40% over 5 years and -65.0% over the last decade according to data from Barchart.com.
Investment bank JP Morgan recently published an equity strategy note in which they set out their preferences in the post-election world; they now prefer Small caps to Large caps and are tactically overweight Value versus Growth.
One way to try and participate in any future appreciation of US Small caps would be through an ETF or mutual fund.
An alternative approach
However, there is another alternative open to UK investors, and that is to gain exposure through the Investment Trust market.
Investment Trusts are closed-end investment vehicles, listed on the London Stock Exchange.
Unlike open-ended funds, the price of the Investments Trust’s stock reflects the supply and demand for the trust. That share price can deviate from the value of its underlying holdings, with the trust’s stock trading at either a premium or discount to its net asset value, or NAV.
One such Investment Trust is the JP Morgan US Smaller Companies Trust, which trades in London under the ticker JUSC.
According to the trust’s factsheet, the JPMorgan US Smaller Companies Trust aims to:
“Provide investors with capital growth by investing in US smaller companies that have a sustainable financial competitive advantage…….. with an emphasis on capital growth rather than income……. (by) Owning equity stakes in businesses that the manager believes trades at a discount to intrinsic value, with strong management teams.”
The JP Morgan US Smaller Companies Trust rallied by +5.78% on Monday and has added +15.40% over the last week and now trades at 484 pence yet that is still at a discount to its current NAV of just over 504p per share.
JUSC has outperformed the S&P 600 index over the last 12 months, the year to date, as well as 6 and 1-month time frames. Could this combination of stock picking and exposure to “a go-ahead sector” be a win-win for investors?
With over 35 years of finance experience, Darren is a highly respected and knowledgeable industry expert. With an extensive career covering trading, sales, analytics and research, he has a vast knowledge covering every aspect of the financial markets.
During his career, Darren has acted for and advised major hedge funds and investment banks such as GLG, Thames River, Ruby Capital and CQS, Dresdner Kleinwort and HSBC.
In addition to the financial analysis and commentary he provides as an editor at GoodMoneyGuide.com, his work has been featured in publications including Fool.co.uk.
As well as extensive experience of writing financial commentary, he previously worked as a Market Research & Client Relationships Manager at Admiral Markets UK Ltd, before providing expert insights as a market analyst at Pepperstone.
Darren is an expert in areas like currency, CFDs, equities and derivatives and has authored over 260 guides on GoodMoneyGuide.com.
He has an aptitude for explaining trading concepts in a way that newcomers can understand, such as this guide to day trading Forex at Pepperstone.com
Darren has done interviews and analysis for companies like Queso, including an interview on technical trading levels.
A well known authority in the industry, he has provided interviews on Bloomberg (UK), CNBC (UK) Reuters (UK), Tiptv (UK), BNN (Canada) and Asharq Bloomberg Arabia.
You can contact Darren at darrensinden@goodmoneyguide.com
